Wall St Week Ahead-Battered stocks face another tough week
Steven C. JohnsonNEW YORK (Reuters) - The bears have been in firmcontrol on Wall Street so far in September, and with anxietyabout the health of the U.S. and world economies on the rise,they probably won't choose next week to go into hibernation.
Despite news the U.S. Treasury could finalize a plan tobackstop beleaguered mortgage finance companies Fannie Mae and Freddie Mac as soon as this weekend, theplan, if enacted, was not expected to pull banking stocks outof the doldrums over the long term.
The Wall Street Journal, citing people familiar with thematter, reported that the plan was expected to involve acreative use of authority the Treasury won in late July to pumpcapital into the two government-sponsored enterprises if itbelieved it was necessary.
The news sent financial shares higher in after-hourstrading on Friday, though shares of Fannie and Freddie fell onconcerns any rescue plan could wipe out shareholder value.
"Apparently there may be the resolution we were hoping forin the offing this weekend," said John Schloegel, a vicepresident of investment strategies for Capital Cities AssetManagement in Austin, Texas.
"This will probably be a short-term positive for financialsbut I don't think this will be an elixir for the entire bankingsector," he added.
For the broader economy, recent data that showed the U.S.economy continues to shed jobs and warnings from a raft ofcompanies about diminished global demand slammed equity marketsover the past week.
The three main U.S. indexes shed more than 2.8 percenteach, with the S&P 500 coming perilously close to a 2008 lowset in mid-July. European and Asian markets also fell sharply.
With markets swooning, speculation that troubled hedgefunds may be off-loading assets has only added to the unease,which analysts say will persist into next week.
"I'm not real optimistic right now," said Kurt Brunner,portfolio manager at the Swarthmore Group in Philadelphia."Things are shaded more negatively now, and I don't see a wholelot of indicators that suggest positive momentum."
For one thing, markets have struggled even as the price ofoil has continued a steady slide, down about 27 percent fromits July record above $147 a barrel. While a positive forconsumers, lower oil prices are also seen as a symptom ofslowing global demand.
Companies, too, have forecast tougher times ahead, withDell Inc predicting slower corporate technologyspending and chip maker Qualcomm saying consumers havegrown slower to upgrade their mobile phone handsets.
"There's been a strong contingent of economists who havebeen feeling that the economy was going to avoid a recession,"said Sasha Kostadinov, portfolio manager at Shaker Investmentsin Cleveland.
"I think now those people who have been holding out arethrowing their beliefs out the window. We've got a softeconomy, credit is tight and the consumer is reallystruggling."
EYE ON THE U.S. ECONOMY
That leaves economic data front and center in the comingweek, with investors paying particular attention to reports onretail sales, first-time jobless claims and pending homesales.
Analysts said signs of further weakness, particularly afterFriday's data showed unemployment hit a five-year high of 6.1percent in August while 84,000 jobs were lost, would add to thestock market's woes.
"It will fuel expectations that the economy is in reallybad shape and we'll see people talking about it falling intorecession," said John Praveen, chief investment strategist atPrudential International Investments Advisers in Newark, NewJersey. "I don't think it will, but the recession talk willresurface, and that will have a negative impact."
While the U.S. economy is undoubtedly fragile, Praveen saidweak data could, along with a stronger U.S. dollar and loweroil prices, put to rest one market fear: inflation.
That may set investors thinking that the Federal Reservehas room to cut interest rates again, which could boostconsumer and business spending. To that end, he said, producerprice data on Friday will be scrubbed for signs of softeningprice pressures.
BANK WOES, ELECTION HEATS UP
There are other hurdles to clear, though, and some of themmay prove high. Wall Street analysts have forecast additionalwrite-downs in the third quarter for a number of financialfirms, which Praveen said will keep pressure on the sector.
And only a week after dodging a bullet with HurricaneGustav, Wall Street will be tracking the path of Hurricane Ikeearly next week as it gathers steam in the Caribbean.
Meanwhile, a firmer U.S. dollar, which hit a year-to-datehigh against a basket of major currencies last week, may takethe shine off export-driven companies, undercutting the onearea of the economy that has been a top performer.
Signs of slower growth in the euro zone and Japan make thatan even bigger concern. European shares shed some 5.8 percentover the last week on growth worries, their worst weekly lossin five and a half years.
"This feeds concern that growth will weaken further,because exports were the one prop the economy had, and thatprop is being removed," Praveen said.
Big industrial companies and technology shares, which havealso benefited from the weak dollar, may suffer as a result.
"We are not running away from those companies that haveglobal exposure, but in the near term it may make sense to movetoward those with more domestic exposure," Brunner said.
Then there's the U.S. presidential campaign, set to heat upnow that the Republicans and Democrats have formally nominatedtheir candidates.
Since polls show little daylight between Republican JohnMcCain and Democrat Barack Obama, investors are bracing formore volatility.
"A tight race could keep equity market investors unsure ofthe outcome as a few key battleground states will likely decidethe election," Citigroup analysts wrote in a note to clients."Such uncertainty could be negative for the stock market nearterm." (Additional reporting by Ellis Mnyandu; Editing by LeslieAdler)