Business

Monday October 26, 2009

US stocks: Investors seek more signs of stronger economic recovery


NEW YORK: Stock bulls may hit the pause button again this week if a wave of earnings due from marquee names such as Exxon Mobil and a slew of economic data offer no fresh incentives to extend Wall Street’s seven-month rally.

Even though the profits that have come in so far have proven surprisingly strong, US stocks have made very little headway as investors search for more definitive signs that the economic recovery is gaining strength.

At best, stocks could trade sideways to consolidate some of the gains seen since the 12-year lows of early March. But at the same time, analysts said the market could have a downward bias as investors fret about outlooks, the potential for a pullback and earnings quality.

Energy, telecoms and consumer goods companies will be in the spotlight as the reporting season kicks into overdrive, with Exxon Mobil, Chevron Corp, Verizon Communications and Colgate-Palmolive among a raft of companies on this week’s scoreboard.

Traders work on the floor of the New York Stock Exchange. - AP

Visa Inc, the world’s largest credit-card network, also is due to report this week.

“What I’ll be looking for is a good industry cross-section to see what revenues are looking like, what company comments are about the overall economy. I’ll be looking for confirmation of this more than anything else,” said Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Illinois.

“The comments that we’ve heard so far are pretty guarded. There are very few companies that came out and said things are great,” he said.

On the economic front, investors will wade through reports on October consumer confidence, August home prices, September new-home sales and durable goods orders and the latest weekly jobless claims, as well as the government’s first estimate on third-quarter gross domestic product (GDP).

In addition, investors will watch the four Treasury auctions that will dominate the market’s landscape this week.

The US Treasury will sell US$123bil of notes this week – a record weekly issuance. Investors are fretting that massive waves of government debt, intended to rescue financial companies and prop up the economy, could eventually endanger the United States’ top level credit rating.

Thursday’s GDP report is forecast, according to economists polled by Reuters, to show that GDP, a measure of all goods and services produced within the US borders, grew at an annual rate of 3.2% in the third quarter, its first quarterly expansion in more than a year.

Analysts said the market’s rally so far also was a reflection of the expectation that GDP might show an improvement.

“That (the GDP number) is going to be fairly significant,” said Cleveland Rueckert, market analyst at Birinyi Associates Inc in Stamford, Connecticut. “There are a lot of people who are still questioning whether this rally is for real and whether or not the stock market is forecasting economic gains.”

The benchmark S&P 500 has rallied 60% since hitting a 12-year closing low on March 9, reflecting optimism about the financial sector’s stabilisation and hopes that the recession that began in December 2007 might be over.

Even so, other analysts said caution might be warranted after the three major US stock indices halted a string of two weeks of gains on Friday.

For the week, the Dow fell 0.2%, the S&P 500 shed 0.7% and the Nasdaq dipped 0.1%.

“We’ve filled up to the brim with great earnings beating on revenues at an unprecedented rate. But the market is now saying, ‘What’s next?,’ ” said John Canally, investment strategist and economist for LPL Financial in Boston. “Most people view the gain in stocks we’ve seen since March as just a bounce and are asking, ‘Is it for real? Is the economy for real? Are the earnings for real?’ ”

About 200 companies in the S&P 500 had reported their third-quarter results through Friday, with Thomson Reuters data showing 81% beat the Street’s profit forecasts.

This week, which will be a hectic one for economic indicators, will wrap up on Friday, the day before Halloween, with a triple dose of data: September personal income and spending, the Chicago purchasing managers’ index for October and a final reading on October consumer sentiment from the Reuters/University of Michigan Surveys of Consumers. — Reuters

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