NEW YORK (CNN/Money) -
For several weeks, Wall Streeters have hunted for clues about how stocks will fare in the second half of the year, beset by uncertainties about the economy, earnings, terrorism, oil prices, the presidential election and more.
Starting Monday, they'll get a mountain of evidence dumped on them -- certainly not enough to solve all these puzzles, but enough to possibly change their views in a significant way by Friday.
First, my dear Watson, a couple of things are elementary: Domestic economic growth has cooled off, and the pace of corporate earnings growth will, too.
This is not Chicken Little gloom-and-dooming; a $10 trillion economy simply can't grow forever at 8 percent a year, the rate of expansion in the third quarter of 2003. And corporate earnings can't grow forever at more than 20 percent a year, as they've done in the past four quarters.
The first question, then, is how jarring the come-down will be. Will it be a teeth-gritting, gripping-the-armrest kind of landing, or one that hardly puts a ripple in your drink?
Last week, a dearth of information about the answer to this $64,000 question, along with higher oil prices and other uncertainty-generating news, kept stocks stuck in the same trading range they've inhabited for several weeks. The Dow Jones industrial average ended down 0.6 percent, the Nasdaq lost 3 percent, and the S&P 500 slid 1 percent. (For info on this week's key events, click here.)
Corporate earnings season, which kicked off last week with the quarterly results of GE (Research), Yahoo! (Research) and Alcoa (Research), could fill in some of the blanks about how corporate America is faring in the near term.
Frustratingly, the early returns have been mixed, with GE thumping its chest about a robust economy, but tech firms either cutting forecasts or failing to live up to wildly exaggerated Wall Street expectations.
But last week's sample size was pitifully small; this week more than 50 S&P 500 companies will report earnings, including Johnson & Johnson (Research); Intel (Research); Nokia (Research); Citigroup (Research); Manpower (Research); Southwest Air (Research) and IBM (Research). (For more on these earnings that matter, click here.)
Meanwhile, investors will continue to glance nervously over their shoulders at the Fed, which has already hit them with one interest-rate hike and has threatened many more if inflation gets out of hand.
Several key government measures of inflation are due this week, including the oft-cited consumer price index (CPI), the oft-tardy producer price index (PPI) and oft-ignored import prices.
These measures don't always tell the gospel truth about what's going on with inflation, but Wall Street pays close attention to them, and the Fed doesn't exactly ignore them, either. If they post big, unexpected gains, Wall Street will have to worry about the Fed jacking up interest rates.
What does it all mean?
The second question is what all of this means for stock prices. With the extreme scenarios, the results are obvious -- runaway inflation and quick Fed tightening is really, really bad, while continued robust economic growth and low inflation is really, really good.
But if things fall in the more-likely middle path, the effects are harder to discern. Right now, many analysts think it doesn't have to mean a darn thing, that stocks can and should return to an upward trajectory in the second half.
"We expect better performance in the second half to follow a lackluster first half, with more uplifting assessment in the markets of issues like inflation, Fed policy, politics and earnings," Subodh Kumar, chief investment strategist at CIBC World Markets, wrote in a recent note to clients, in which he said he was still OK with CIBC's late-May decision to put more cash into stocks and bonds.
Other analysts aren't so sanguine, seeing too many indicators still pointing in the wrong direction.
Most ominously, according to Richard Suttmeier, chief market strategist at Joseph Stevens, is the fact that the Nasdaq's 50-day moving average recently crossed below its 200-day moving average, a sign that this year's lousy market for tech stocks has been deteriorating at a faster rate.
If the health of tech is indicative of the future health of business spending and the economy generally, as some analysts believe, this action could give one a sense that things aren't going to be nearly as hunky-dory as the optimists believe, especially if the recent slew of tech warnings continues.
"That [moving-average] rollover is the mirror image of a bullish crossover that happened in March/April of 2003," Suttmeier said. "That gives a significant amount of risk to the market."
Meanwhile, a persistent sheen of optimism could be a barrier to stocks moving higher, especially if they're already overpriced, as some bearish analysts think they are. If companies jump through all the hoops, they'll only be meeting expectations. And if things go even slightly wrong, then the sunny optimists might be inclined to punish stocks, as they did Yahoo! last week.
"I sense there's probably more optimism now that's potentially set to be dashed on any sign of negative surprise," said Michael Panzner, head of sales trading at Rabo Securities USA. "I don't want to make case that it's a perma-bear scenario, but the smart thing now may be to just sort of keep your cards close to your chest, and maybe even sit on your hands."
Key events in the week ahead:
- Tuesday morning, the Commerce Department reports on how wide the U.S. trade imbalance with the rest of the world was in May. Economists, on average, expect a gap of $48.3 billion, matching April's imbalance, according to Briefing.com.
- Tuesday afternoon, the Treasury Department reports on how bad the other whopping deficit, the one in the federal budget, was in June. Economists, on average, expect it to shrink to $16.3 billion from $21.2 billion in May.
- Later Tuesday afternoon, Kansas City Fed President Thomas Hoenig is scheduled to speak to K.C. business leaders about monetary policy. Hoenig is a voting member of the Fed's policy-making committee.
- Wednesday morning, Commerce is scheduled to report on retail sales in June. Economists, on average, expect sales to fall 0.7 percent after growing 1.2 percent in May. Excluding automobiles, sales are expected to rise 0.3 percent, following May's 0.7-percent gain.
- Also Wednesday morning, the Labor Department reports on import and export prices in June. Excluding farm products, export prices rose 0.2 percent in May. Excluding oil, import prices rose 0.4 percent.
- Thursday morning, the Labor Department reports on the number of new claims for unemployment benefits in the week ending July 9. Economists, on average, expect claims to rise to 333,000 from 310,000 the prior week.
- Also Thursday morning, Labor is scheduled to release the PPI for June. This report has been bumped several times before, so beware. When it does come, economists expect it to show a 0.2-percent gain in PPI, compared with 0.8 percent in May. Core PPI, which strips out food and energy prices, is expected to gain 0.2 percent, compared with 0.3 percent in May.
- Meanwhile, Thursday morning will also bring the New York Fed's measure of manufacturing activity in New York in July. Economists expect it to slow to 28 from 30.2 in June.
- Later on a busy Thursday morning, the Fed is expected to release its measures of industrial production and factory capacity utilization in June. Economists believe industrial output slowed to a 0.1-percent gain, compared with 1.1 percent in May, and that capacity utilization slowed to 77.7 percent from 77.8 percent in May.
- At noon on Thursday, the Philadelphia Fed releases its own measure of manufacturing activity in July, covering Pennsylvania, New Jersey and Delaware. Economists expect that gauge to slip to 25 from 28.9 in June.
- Friday morning brings the Labor Department's reading on CPI in June. Economists expect a 0.2-percent gain, compared with 0.6 percent in May. Ex-food and energy, core CPI is expected to rise 0.2 percent, matching May.
- Later Friday morning, the University of Michigan is scheduled to release its preliminary reading on consumer sentiment in July. Economists expect the index to rise to 97 from 95.6 in June.
- Friday night, Fed Governor Susan Schmidt Bies is scheduled to speak about financial conditions to financial executives in Chicago.
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