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Will the bounce continue?
Terror worries may overshadow economic ones in the week ahead.
August 1, 2004: 8:01 PM EDT
By Mark Gongloff, CNN/Money senior writer

NEW YORK (CNN/Money) - Stocks have rebounded smartly after coming near or touching their lows for the year in July. But this week, critical economic data will have to compete for traders' attention with a new terrorism threat against companies and financial institutions.

Secretary of Homeland Security Tom Ridge identified the NYSE, Citigroup, the IMF and the World Bank among targets identified in information he described as "alarming in both the amount and specificity."

The NYSE will open as scheduled Monday, amidst increased security and police presence, with New York Mayor Michael Bloomberg ringing the opening bell.

After sinking to roughly 1,080, a level at which buyers usually rush in to get bargains, the S&P bounced back this week, and the other major indexes did as well. The S&P closed 1.4 percent higher, while the Dow Jones Industrial Average gained 1.8 percent and the Nasdaq rose 2.1 percent.

It was a fair end to a brutal month, but these gains seemed mostly driven by the laws of physics -- drop a rubber ball and it will bounce back up -- and market dynamics than by any sterling faith in the future. After all, much of the news last week was fairly bad, from Wall Street's perspective.

The price of oil set a new record. Gross Domestic Product (GDP) growth, the broadest measure of the economy, turned out to be weaker than expected in the second quarter. John Kerry, the Democratic presidential candidate who is not generally well loved by Wall Street, had a fairly successful convention, according to many pundits. (For a rundown of the coming week's key events, click here.)

This week will bring more potential landmines -- critical reports about the economy's health in July. After a June swoon, economists are crossing their fingers and hoping activity bounced back.

But given the market's ability to rise last week despite mixed news, this week's economic data may not matter much to the life span of the current bounce.

"With the summer doldrums, there is a different atmosphere for trading," said Joann Farrell Quinn, director of trading at Great Companies in Tampa. "I don't feel like the economy's been taken into consideration as much as it has in the past, because people are looking more towards the end of the summer and the elections -- they have other concerns in mind."

Quinn believes the broader indexes could shake off the economic data and behave as they did in May and June, when another technical bounce lasted for slightly more than a month. If so, then the summer blahs could end with indexes at the top end of their trading range -- around 1,140 on the S&P, roughly -- and ready for good news to send them higher.

That may be so, but other analysts are disturbed by the level of complacency they see in the market. The fact that good news has lately been greeted with a giant yawn could mean it's going to be tough to find reasons to keep moving upward.

"It's like everybody's got such high expectations that nothing's going to please them," said Frank Gretz, market analyst at Shields & Co. "That's not usually the way the market goes higher."

Gretz believes the major indexes still have a lot of downside in them, that the 2003 bull market still must be corrected, and that, once stocks start to correct, they usually correct by about 20 to 30 percent. The correction so far? Only about 6 percent.

"We're in the process of gradually deteriorating," Gretz said.

Ozan Akcin, chief market strategist with Puglisi & Co., disagrees, believing the fundamentals of decent economic growth and solid corporate earnings should be supporting higher stock prices. While technical analysts see too much happy complacency, he sees too much pessimism.

"We still have other factors causing sentiment to be at bay even though fundamentals look strong," Akcin said, citing worries about terrorism, oil prices and the November election.

For that reason, he, too, doubts this week's data will have very much of an impact on market behavior. Extremely strong readings on some of the week's key reports, such as Friday's job report, could give a little bit of fuel to the technical bounce, but Akcin's optimism, for the summer at least, is waning.

"If we do get very positive data next week, that could turn things a bit," he said. "But we have gains and then retrace very quickly. It's hard to imagine something sticking."

How strong will job growth be?

This week marks the winding down of the second-quarter earnings season, with just 47 companies in the S&P 500 reporting, and few of any real note.

This earnings season has been a bit of a bust anyway. Sure, it's been fantastic, with year-over-year earnings growth in the S&P of more than 24 percent, the fourth straight quarter of 20-percent-plus growth. But the market has yawned at the fantastic news and overreacted negatively to the less-than-fantastic news.

This week also brings two of the most critical economic reports of the month. The Institute for Supply Management's (ISM) measure of July manufacturing activity and the Labor Department's measure of unemployment and nonfarm payroll growth in July.

The economy clearly slowed down in June, weighed down by high oil prices, higher interest rates and a few other woes. Most economists think it bounced back somewhat sharply in July, and they think job growth rebounded, too.

Wall Street expects job growth of at least 233,000 new nonfarm payroll jobs, after a lower-than-expected 112,000 in June. The lowest forecast on Wall Street is barely below 200,000. The highest is 310,000.

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Though Goldman Sachs economists pointed out Friday that there are technical factors that could push payroll growth above 300,000, there also may be reason to believe the numbers could fall well short of that.

Richard Yamarone, chief economist at Argus Research, has often had one of the Street's lowest forecasts in recent months, and this month, too, with a lowball prediction of between 165,000 and 190,000 new jobs.

He listens every quarter to hundreds of corporate earnings conference calls -- if you've ever listened to just one of those, you have some idea of what a Herculean effort this is. And he still isn't hearing the kind of corporate confidence consistent with monthly job gains that could regularly exceed 200,000.

"We're more likely to get between 100,000 to 200,000, maybe 250,000 jobs a month in the coming months, and fluctuating -- very choppy," Yamarone said.

Such job growth wouldn't be the end of the world by any stretch, but it could have consequences for wage growth, consumer spending, the Federal Reserve and the November election that could, at last, make Wall Street take notice.

Key events in the week ahead:

  • Monday morning, the ISM releases its closely watched index of manufacturing activity in July. Economists, on average, expect the index to rise to 62 from 61.1 in June, according to Briefing.com.
  • Also Monday, the Commerce Department reports on construction spending for the month of June. Economists expect spending to shrink 0.1 percent after gaining 0.3 percent in May.
  • Tuesday morning, the Commerce Department releases its figures for personal income and spending in June. This report contains the Federal Reserve's favorite inflation gauge, the personal consumption expenditure deflator. Say that ten times fast. Economists expect income to rise 0.3 percent after gaining 0.6 percent in May, and they think spending was flat after gaining 0.1 percent in May.
  • Wednesday morning, the ISM releases its index of nonmanufacturing activity in July. Economists expect the measure to rise to 61.5 from 59.9 in May.
  • Also Wednesday morning, the Commerce Department reports on June orders for goods made in U.S. factories. Economists expect orders to rise 0.6 percent after shrinking 0.3 percent in May.
  • Thursday morning, the Labor Department reports on the number of new claims for unemployment benefits in the week ending July 30. Claims rose to 345,000 the prior week.
  • Friday morning, the Labor Department releases its figures for unemployment and nonfarm payroll growth in July. The unemployment rate is expected to hold steady at 5.6 percent. Payrolls are expected to grow by 233,000, compared with 112,000 in June.
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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.