Published June 22, 2009

WALL STREET INSIGHT
Rally falters as US market awaits next catalyst

As inflation worries return, analysts look to Fed's comments on rates, economy

By ANDREW MARKS
IN NEW YORK
Email this article
Print article
Feedback

US stocks snapped a four-week winning streak with modest losses last week, but on Wall Street the worry among traders and investment managers was more about whether investors with heaps of money still sitting on the sidelines will shift into equities any time soon.

Indeed, many traders say that without any clear catalyst to drive the market higher in coming weeks, the sideways movement and thin volume that has characterised the US equities market since a strong first week of June may very well be the best investors can hope for as the summer doldrums settle in.

'Rather than a bullish anxiety to join in on the rally before they miss out on even further gains, optimism has been waning and investor sentiment seems to have shifted to a worry that this market doesn't have much reason to go further up after gains of more than 40 per cent since early March,' said Todd Salomone, vice-president of research at Schaeffer Investment Research.

'For the first time since the financial crisis began back in September, we saw investors last week starting to worry about inflationary pressures and how they will impact the sustainability of a rally that many people think has gone too far,' he said.

Although the producer price and consumer price index reports issued last week for May were mostly reassuring, the government's massive stimulus spending, rising bond yields, and a precipitant rise in commodities, particularly oil prices, has investors fretting over the chances that inflation could hinder a recovery.



While most economists believe it is way too early to start worrying about inflationary pressures in an economy that continues to throw off jobs and show declining consumer spending, market analysts like Tobias Levkovich, chief investment strategist at Citgroup, see these kind of concerns as more of a reflection of a general anxiety over whether the stock market has room to advance after the outsized gains of the past three months.

Mr Levkovich, an early proponent of the case for a big market rebound, jumping on the bullish bandwagon and riding it since March, has, like many other market strategists and investment managers, turned cautious lately.

'There is still room for modest gains from current levels, but the bulk of the move may already have occurred and investors need to lower their expectations,' he said.

But Cantor Fitzgerald's Marc Pado, another early bull who caught the rebound wave back in March, believes the next catalyst for stocks is right around the corner in the form of second quarter earnings. 'I think we're setting up for another quarter of positive surprises that will help push stocks higher after this pause,' he said.

On Friday, investors' lack of conviction about the market's direction was in ample evidence, as stocks see-sawed between triple digit gains and losses, until the blue chip index settled for a loss of 15.87 points, or 0.2 per cent, to close at 8,539.73. However, the S&P 500 gained 2.86 points, or 0.3 per cent, while the tech-heavy Nasdaq shot up nearly 20 points, or 1.09 per cent.

For the week, the Dow lost 3 per cent, pushing it back into negative territory for the year. The S&P shed 2.6 per cent and the Nasdaq fell 1.7 per cent.

In the coming week, the spotlight will be on the two- day meeting of the Federal Reserve's interest rate policy-making committee on Tuesday and Wednesday.

No one expects the Fed to announce any action on rates when it releases its statement on Wednesday, and most Fed watchers expect the Federal Open Market Committee to restate its commitment to keeping rates down until economic conditions improve.

But with Wall Street increasingly skittish over inflation, investors will be carefully scrutinising the Fed's comments about the pace of the economy's improvement for clues to Fed chief Ben Bernanke's thinking on how far down the road a rate hike might be on the cards.

Investors will also be interested in testimony from the Fed chairman at a Congressional committee on Thursday on his role in the Bank of America, Merrill Lynch merger.

Rising yields on 10-year Treasury notes - which closed the week at 3.8 per cent - have pushed up mortgage rates, which could slow a recovery in the housing market.

Investors will have a chance to scrutinise important housing data this week, with existing home sales for May scheduled for release tomorrow, and new home sales for May on Wednesday.

Another key piece of economic data on tap this week is the May durable goods report. Weekly jobless claims and the final look at first quarter GDP are scheduled for Thursday, with personal income for May and consumer sentiment slated for Friday.

Investors will also get an interesting preview of the upcoming second quarter corporate earnings this week, with several major companies offering up their second quarter numbers a couple of weeks ahead of the rest of the pack.