After nine months of turmoil that started with the collapse of the subprime
mortgage market, Wall Street appears to be at a turning point of sorts.
The data of the past few weeks have given investors some hope that the worst
of the credit crisis has passed, that the economy isn't losing jobs at a
dangerous rate and that inflation isn't out of control. The result has been
relative calm in the financial markets, enabling the major indexes to reach
levels they hadn't seen since early in the year — including the Dow Jones
industrials' brief return earlier this month to the 13,000 mark.
Analysts say data to be released in June and July will determine whether Wall
Street extends its recovery or backtracks. If it moves higher, it will break an
old habit of pulling back during the summer doldrums — and some analysts believe
this may indeed come to pass.
"There's a bullish momentum that overrides the typical seasonal factors that
would tell you to sell stocks in the summer," said David Kotok, chairman and
chief investment officer of New Jersey-based Cumberland Advisors.
The market will also have its eye on the rising price of oil as it reviews
each report. And if oil continues to press higher, it could temper the market's
enthusiasm should the economic numbers are upbeat.
For now, the big bet is that economic reports and other key data will show the
U.S. was in a mild recession, and that a recovery is already in play. If
investors get the confirmation they are looking for, cash could stream into the
stock market.
The next two weeks have important numbers including April wholesale inflation
and existing home sales, as well as another reading on first-quarter gross
domestic product. And two critical reports on consumer confidence and spending —
which may show whether increasingly expensive gasoline is making households cut
back on discretionary purchases.
When reports start coming out in early June, they should be able to show among
other things whether the string of interest rate cuts since last summer have had
the desired effect of getting a hobbled economy growing again.
In the first week of June, the Institute for Supply Management issues its
assessments of the manufacturing and service economies during May and the
government releases its report on whether jobs were created or lost during the
month.
"We're going to find out if the stock market is right, and that this will be
one of the shallowest recessions on record," said Dan Seiver, a finance
professor at San Diego State University. "Or, that the economy is going to be
sicker longer, and when the market realizes that it will have a nasty down-leg."
In the second week of June, one of the key reports will be the Fed's own
evaluation of the economy, its Beige Book survey of how the regions of the U.S.
are faring in the current economic climate.
Nine of the 12 Fed districts surveyed in March said that economic growth
slowed because of anemic real estate markets and a slowdown in consumer
spending. It showed the economy was certainly troubled, but not plunging.
Of course, Wall Street always pays close attention to economic reports, and
was doing so long before the credit crisis. But the data takes on greater
significance when many investors have put their cash on the sidelines and are
deciding to put it back into the market — or to leave it there and take even
more money out of stocks if the numbers point to a continuing slump or if
they're inconclusive.
Along with Wall Street, the Fed will be parsing the data. But the central bank
itself will be one of the most crucial economic indicators when it meets again
June 24-25 — Wall Street wants the Fed to provide a stronger sign that it feels
April's quarter-point cut of the fed funds rate will be the last, and that the
economy is back on track for growth.
And analysts like Kotok are betting that the Fed's efforts to energize the
economy have worked — and that will give the market permission to charge ahead.
"Our view is the Fed will succeed because it has the power to do so, and it
has now caught on to the fact that this is serious," he said. "The stock market
is anticipating it, and confirmation of this might not be that far off."
Nothing in this article is, or should be construed as, investment advice.
Rohit
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