New week, old worries
Concerns about inflation and interest rates aren't going away, and that could make for some gloomy markets.
NEW YORK (CNNMoney.com) - The tug of war in the stock market isn't showing any signs of letting up.
Investors spent last week fluctuating between bullish and bearish sentiment, and this week should prove to be much of the same as they try to determine if the recent downturn is the beginning of a broader bear market or just a brief correction.
Last week, stocks started out the short week on a dismal note, with the Dow shedding nearly 200 points Tuesday.
But markets bounced back Wednesday after the release of the minutes from the May 10 Fed meeting temporarily calmed concerns over the interest rate outlook. (Full story.)
A much weaker jobs report Friday - on the heels of Thursday's surprisingly weak manufacturing report - suggested that the Federal Reserve may stop raising interest rates, but also raised some concern on Wall Street that the economy may be headed for a downturn.
Economists say the Fed has a tough job ahead as it prepares to wind down two years of interest rate hikes and tries to battle what appear to be rising inflationary pressures just as the economy looks set to slow.
But analysts are divided on what will happen when Fed policy-makers next meet at the end of June.
"Will the Federal Reserve raise short term rates? The answer to that is 'No,'" said Hugh Johnson, chairman of asset management company Johnson Illington Advisors. "The question now is the economy simply slowing or is it turning down."
But Harry Clark, chief executive of Clark Capital Management, said the Fed will succumb to a case of overshoot and not only raise rates in June but in August as well, setting up the market for a broad selloff in the fall.
"They've overshot 13 out of the last 15 times," said Clark.
All eyes on the Fed
Investors have been picking apart any economic numbers of late, looking for clues as to what the Fed will do in regards to interest rates.
Unlike the last two years, when the Fed made it plain it would continue to raise rates at a measured pace, central bank policy-makers have now said they simply don't know what will come next and are watching the economic numbers, just like everyone else.
This week is light on key economic reports, but investors will be watching April readings on the trade balance and wholesale inventories. (See chart for details.)
David Briggs, head of equity trading at Federated Investors, said his team is looking ahead to the inflation-measuring Consumer Price Index, due June 14, as the next big event.
Stock investors don't like higher interest rates because they ultimately slow the flow of money through the economy and put the brakes on corporate profit growth, thus making stocks less appealing.
After 16 straight quarter-percentage point rate hikes over the past two years, the central bank's target for its fed funds rate, a key overnight bank lending rate, stands at 5 percent.
Earnings trickle out
Only nine S&P 500 companies have yet to report results, which means earnings reporting period is all but over, and the results have been bullish.
Earnings grew 14.9 percent versus a year earlier, according to earnings tracker Thomson. That's a blended figure, combining forecasted and reported earnings.
That means the first quarter was the 11th in a row in which S&P earnings gained at least 10 percent.
Nonetheless, the positive earnings news seems to have taken a back seat to concerns on the Street over the uncertainty surrounding the rate outlook.
"We know we're not at the bottom," said Briggs, commenting on May's sharp decline, which he said was the worst May in over two decades. "I think we're in for a choppy spell at best."
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