NEW YORK – Investors are just not sure where the economy is headed. And so the stock market may be in limbo for a while.
After stocks stumbled last week on disappointing reports on housing and manufacturing, investors are concerned that the economy's rebound will be slower than originally thought. They may cool their buying and even resort to more selling until they are more certain that the strength of the recovery warrants extending the nearly seven-month-long advance in stocks.
"The significant advance that the market has had ... has left some people with an itchy trigger finger," said Jim McDonald, chief investment strategist at Northern Trust.
This week, a number of data points should provide more insight. Chief among the reports is the Labor Department's monthly reading on the labor market, due Friday. Unemployment is considered one of the economy's biggest obstacles.
Investors will also get reports on home prices, manufacturing, consumer confidence, construction spending and factory orders. Beyond the economic data, investors will be watching for updated outlooks from companies ahead of third-quarter earnings reports next month.
As the quarter comes to a close, this is the time when companies may signal how well they have been faring and what their expectations are for the remainder of the year.
"Typically stocks will be soft going in to the actual earnings reports," McDonald said, noting that stocks pulled back about 7 percent during the four weeks leading up to second-quarter earnings season this summer.
The stock market sold off last week, weighed down by unexpected drops in home sales and durable goods orders, as well as tumbling commodity prices. Investors looked past a better-than-expected report on unemployment and an improvement in consumer sentiment. A more upbeat assessment of the economy from the Federal Reserve also wasn't enough to stoke buying.
For the week, the Dow Jones industrials fell 1.6 percent, the Standard & Poor's 500 index lost 2.2 percent and the Nasdaq composite index slid 2 percent.
Though the Fed kept its benchmark interest rate at a record low of near zero, and signaled that it plans to keep rates low for some time, the central bank is starting to wind down other stimulus programs. The Fed plans to slow its purchases of mortgage-backed securities and also reduce two emergency lending programs. A first-time home buyer's credit is set to expire in November.
Investors are worried that the economy's nascent recovery could falter without continued government support.
"It's quite clear that some of these stimulus programs have had a favorable impact on the economy," said Ward McCarthy, chief financial economist at Jefferies & Co. That could "create the potential for some disappointment in the months ahead when these stimulus programs expire."
The market has been on a fairly steady climb higher since hitting 12-year lows in early March. With the Standard & Poor's 500 index up 54.4 percent since then, many analysts have been warning that the market will inevitably retreat, and perhaps see more selling than the periodic pullbacks like the drop stocks suffered in June.
What may ultimately lift the market is the fact many investors are still not in the market and may want to get in for fear of missing another rally.
"On the bullish side, we have all this cash and people looking to get in on the dips, but on the bearish side, this market has run so much ahead of the fundamentals," said Tyler Vernon, portfolio manager at Princeton, N.J.-based investment management firm Biltmore Capital Advisors.
Analysts say last week's decline doesn't necessarily mean the market's sentiment has changed. If anything, investors have come to accept that some of the economic data, especially on the labor front, will be weak for the foreseeable future.
The number of people who lost their jobs in August slowed from the previous month, but the unemployment rate swelled to 9.7 percent, the highest level since June 1983. Many analysts are expecting the unemployment rate to climb to at least 10 percent by the end of this year.
"We have to understand that we're in the early stages of a recovery and in the early stages of a recovery the data tends to be mixed for the simple reason that ... not all sectors or regions of the economy recover at the same time," said Jefferies' McCarthy.
NEW YORK (Reuters) –
The rally in U.S. stocks, which stumbled in recent days on worries about the economic recovery and continued government stimulus, will be tested this week by crucial data on growth and jobs.
Investors are set to pore over September non-farm payrolls, the final reading of second-quarter gross domestic product and several other big economic reports.
The data comes amid signs the rally in stocks, which has lifted the Standard & Poor's 500 index (.SPX) some 54 percent since early March, could be fizzling out.
The market suffered three straight days of losses last week and the S&P put in its biggest weekly drop since early July, with data on Friday showing new orders for long-lasting U.S. manufactured goods falling by their biggest margin in seven months.
This week the focus likely will be on Friday's monthly U.S. government jobs data. The 9.7 percent U.S. unemployment rate is a major concern for investors because of the impact on the economy and, in particular, consumer spending.
"It's a big deal every time, because it's really one of the most sensitive indicators," said Cummins Catherwood, managing director at Boenning and Scattergood in West Conshohocken, Pennsylvania.
"This is right where the rubber meets the road: Do I have a job or don't I?" he said.
End-of-quarter positioning also could provide some lift to stocks, as fund managers move money out of bonds and into equities, analysts said.
Investors also will watch Federal Reserve Chairman Ben Bernanke, who is scheduled to speak on financial regulatory reform before a House of Representatives panel on Thursday.
A LOSING WEEK
For last week, the S&P 500 fell 2.2 percent, the Dow Jones industrial average (.DJI) dropped 1.6 percent and the Nasdaq (.IXIC) declined 2 percent.
On Thursday, stocks slid as world central banks said they would scale back infusions of U.S. dollars into their banking systems. That came a day after stocks sold off following the Fed's decision to slow purchases of mortgage debt.
But the S&P 500 is still on track for gains of about 14 percent this quarter and that would follow gains of 15 percent in the previous quarter.
"People are still underweight in equities, and after a big surge, they're going to try to be playing catch-up," said Fred Dickson, market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
For Friday's report, a poll of economists by Reuters showed a loss of 180,000 non-farm jobs, which would be an improvement from a decline of 216,000 jobs in August. But the unemployment rate is seen rising to 9.8 percent.
Dickson said an increase in overtime hours should also be watched as that could suggest a positive trend.
"It's a very early indicator of a turn," he said.
Final second-quarter GDP data also is on tap for Wednesday, and investors will be anxious to see if the report shows any downward changes from the prior estimate of a 1.0 percent contraction.
"The market will not take kindly to downward revisions of GDP next week," said David Dietze, chief investment officer of Point View Financial Services in Summit, New Jersey.
Also expected this week are data on home prices from S&P/Case-Shiller, consumer confidence from the Conference Board and factory activity from the Institute for Supply Management.
(Additional reporting by Ellis Mnyandu; Editing by Kenneth Barry)
LONDON (Reuters) –
Kraft Foods Inc (KFT.N) is poised to launch a hostile bid for Cadbury Plc (CBRY.L) valuing the British confectionery business at around 11 billion pounds ($17.6 billion), a report in The Observer newspaper said.
In a separate interview with the Sunday Times, Kraft Chairman and Chief Executive Irene Rosenfeld said Cadbury CEO Todd Stitzer had failed to "do the math quite accurately" after he claimed Cadbury's own growth strategy would deliver superior returns compared with Kraft's cash and stock offer.
The Observer said Britain's Takeover Panel is preparing this week to set the U.S. group a deadline by which time it must put a firm offer on the table for Cadbury or walk away for six months.
Citing financial sources, the Observer said Kraft could bid 800 pence a share initially, rising to 850p ($1.36) as the battle reaches its climax during a 60-day time limit likely to be set by the Panel.
Kraft was not immediately available for comment.
(Reporting by Matt Scuffham; Editing by David Holmes)