Sunday September 3, 1:04 pm Eastern Time
WALL ST WEEKAHEAD - Bulls see reasons to smile
By Haitham Haddadin
NEW YORK, Sept 3 (Reuters) - Some on Wall Street believe the late summer rally will gain ground beyond this week and may race sharply higher later this month, on the perception that interest rates have reached their peak.
Analysts say the late summer rally, although viewed by some as a low-volume bear market advance until it breaks key upside levels, was more likely to remain intact with the market poised for a near-term upswing in the holiday-shortened trading week starting Tuesday.
The reason: Recent economic data has showed the economy slowing enough for the U.S. Federal Reserve to most likely stay put on interest rates, but not so deep as to hurt corporate America's profits.
A halt in the Fed's interest rate hike crusade is good news for companies whose borrowing costs were raised six times since June 1999 by the U.S. central bank vying to stem inflation.
``The tug of war between higher interest rates and the stock market seems to be coming to an end,'' Peter Cardillo of Westfalia Investments said.
``Investors are starting to feel more comfortable with the market scenario..I suspect that this week things are looking very good,'' he added.
But some warned a pullback was not ruled out in sectors deemed fully valued and pockets of weakness were seen in stocks like retailers, whose shares were mauled recently after key sector players warned about profits due to sluggish sales.
Traders will look for more signs of moderate economic growth in Wednesday's retail sales for the previous week, and the revised productivity figures for the second quarter. Also on the table that day is the National Association of Purchasing Management (NAPM) non-farm manfucturing index for August and Thursday's jobless claims numbers for last week. No data is expected Monday when the markets close for Labour Day holiday.
The important numbers, however, are due the following week, the Consumer Price Index (CPI) and Producer Price Index (PPI) -- measures of inflation at the retail and wholesale levels, respectively, which remains the Fed's paramount concern and the one thing that could upset market sentiment. The PPI is due to be issued Sept. 14, with the CPI due out the following day.
MOST ECONOMIC DATA BODE WELL FOR MARKET
The market's tone near-term, analysts said, has been set by last Friday's widely-watched numbers on jobs and manufacturing. Cheered by the markets which extended the August rally, these showed a steep drop in jobs creation, or an easing of the tight U.S. labour market, and a drop in manufacturing activity.
Analysts have largely discounted the impact of other recent reports that painted a different picture, like the July homes data showing sales rising to their highest level in years. Instead, they took note of items like last Thursday's July factory orders report which posted the biggest drop on record.
``What may not be good for Main Street is certainly good for Wall Street,'' said Westfalia's Cardillo.
``I think we will see a continuation of this rally unless we get some real surprises,'' said John Davidson, chief investment officer at Orbitex Management. ``People will come back and put some money to work.''
While some main market indices still have a way to go to reach peaks hit earlier this year, the broad S&P 500 (^SPX - news) is a hair away from its record close late March at 1,527.46.
The only problem is that recent rallies came sometimes on wafer-thin summer volumes, with many market players away.
Westfalia's Cardillo said the blue chip Dow Jones industrial average (^DJI - news) still had some way to go on the upside but if it broke through its higher trading range on increased volume ``we will probably be testing the all time highs we saw earlier.''
He pointed to two positive fundamentals looking forward: third-quarter earnings will be ``respectable,'' though not as robust as the last quarter's, and a lot of cash is on the sidelines awaiting bullish signals.
Deutsche Banc Alex. Brown said in a report that recent data that showed U.S. workers productivity grew at its fastest pace in 17 years in the year to June, which depressred labour costs for employers, ``raised renewed confidence in financial markets that the record-breaking expansion is set to continue.''
Jay Feldman, an economist at Credit Swiss First Boston agreed. With U.S. productivity strong, he sees plenty of room for strong corporate profit growth. Meanwhile Gross Domestic Product (GDP) growth was slowing down, ``but to a pace that is still consistent with decent profit expansion,'' he added.
OTHERS TAKE MORE CAUTIOUS VIEW
But other analyts warned that too much of a slowdown remains a concern.
``It's a good thing from the stock market's point of view that the economy is doing what policy makers want it to do, but the slowdown in itself is not entirely welcome,'' Bill Cheney, chief economist for John Hancock Funds, said.
``You wonder why people are happy that the economy is slowing,'' said Edgar Peters, chief investment strategist at Boston-based PanAgora Asset Management.
``Companies are not making more money but they are bringing in more revenue ... and the stock market is being priced for profit growth and we are not getting the kind of growth needed and eventually it is going to catch-up,'' Peters noted.
All eyes will be peeled on the financial sector amid feverish merger speculation following last week's news that Swiss bank Credit Suisse will buy U.S. investment bank Donaldson Lufkin & Jenrette (NYSE:DLJ - news).
But analysts warned of continued weakness in retail after high profile companies like clothing firm Gap Inc (NYSE:GPS - news) or grocer chain Albertson's Inc (NYSE:ABS - news) warned profits may be hit by slow sales. Retailers were hurt by rising interest rates, rising oil prices, and unseasonably cool weather in many areas and a lag in consumer spending which dampened sales for many.
Another concern for the markets are runaway oil prices, amid fears of a winter supply squeeze in products like heating oil, which could stoke inflation. Traders will be awaiting the outcome of the Sept. 10 meeting of the oil ministers of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna, which will review production policy. |
