Battered stocks face another tough week
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By Steven C. JohnsonNEW YORK (Reuters) - The bears have been in firm control on Wall Street so far in September, and with anxiety about the health of the United States and world economies on the rise, they probably will not choose this week to go into hibernation.Federal Reserve Chairman Ben Bernanke said on Sunday he strongly endorses the decision to place beleaguered mortgage finance companies Fannie Mae and Freddie Mac into conservatorship."These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," Bernanke said in a statement.Federal Housing Finance Agency Director James Lockhart placed Fannie Mae and Freddie Mac into conservatorship to ensure the financial soundness of the two companies.Federal Bank regulators including the Fed, Federal Deposit Insurance Corporation, Office of the Controller of the Currency and the Office of Thrift Supervision said a limited number of smaller banks have holding that are significant compared to their capital.In a joint statement the regulatory agencies said "they are prepared to work with these institutions to develop capital-restoration plans pursuant to the capital regulations."The plan, however, was not expected to pull banking stocks out of the doldrums over the long term.For the broader economy, recent data that showed the U.S. economy continues to shed jobs and warnings from a raft of companies about diminished global demand slammed equity markets over the past week.The three main U.S. indexes lost more than 2.8 percent each, with the S&P 500 coming perilously close to a 2008 low set in mid-July. European and Asian markets also fell sharply.With markets swooning, speculation that troubled hedge funds may be off-loading assets has only added to the unease, which analysts say will persist into this 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 whole lot of indicators that suggest positive momentum."For one thing, markets have struggled even as the price of oil has continued a steady slide, down about 27 percent from its July record above $147 a barrel. While a positive for consumers, lower oil prices are also seen as a symptom of slowing global demand.Companies, too, have forecast tougher times ahead, with Dell Inc predicting slower corporate technology spending and chip maker Qualcomm saying consumers have grown slower to upgrade their mobile phone handsets."There's been a strong contingent of economists who have been feeling that the economy was going to avoid a recession," said Sasha Kostadinov, portfolio manager at Shaker Investments in Cleveland."I think now those people who have been holding out are throwing their beliefs out the window. We have got a soft economy, credit is tight and the consumer is really struggling."EYE ON THE U.S. ECONOMYThat leaves economic data front and center in the coming week, with investors paying particular attention to reports on retail sales, first-time jobless claims and pending home sales.Analysts said signs of further weakness, particularly after Friday's data showed unemployment hit a five-year high of 6.1 percent in August while 84,000 jobs were lost, would add to the stock market's woes."It will fuel expectations that the economy is in really bad shape and we'll see people talking about it falling into recession," said John Praveen, chief investment strategist at Prudential International Investments Advisers in Newark, New Jersey. "I don't think it will, but the recession talk will resurface, and that will have a negative impact."While the U.S. economy is undoubtedly fragile, Praveen said weak data could, along with a stronger U.S. dollar and lower oil prices, put to rest one market fear: inflation.That may set investors thinking that the Federal Reserve has room to cut interest rates again, which could boost consumer and business spending. To that end, he said, producer price data on Friday will be scrubbed for signs of softening price pressures.BANK WOES, ELECTION HEATS UPThere are other hurdles to clear, though, and some of them may prove high. Wall Street analysts have forecast additional write-downs in the third quarter for a number of financial firms, which Praveen said will keep pressure on the sector.And only a week after dodging a bullet with Hurricane Gustav, Wall Street will be tracking the path of Hurricane Ike early this week as it gathers steam in the Caribbean.Meanwhile, a firmer U.S. dollar, which hit a year-to-date high against a basket of major currencies last week, may take the shine off export-driven companies, undercutting the one area of the economy that has been a top performer.Signs of slower growth in the euro zone and Japan make that an even bigger concern. European shares shed some 5.8 percent over the last week on growth worries, their worst weekly loss in 5 1/2 years."This feeds concern that growth will weaken further, because exports were the one prop the economy had, and that prop is being removed," Praveen said.Big industrial companies and technology shares, which have also benefited from the weak dollar, may suffer as a result."We are not running away from those companies that have global exposure, but in the near term it may make sense to move toward those with more domestic exposure," Brunner said.Then there is the U.S. presidential campaign, set to heat up now that the Republicans and Democrats have formally nominated their candidates.Since polls show little daylight between Republican John McCain and Democrat Barack Obama, investors are bracing for more volatility."A tight race could keep equity market investors unsure of the outcome as a few key battleground states will likely decide the election," Citigroup analysts wrote in a note to clients. "Such uncertainty could be negative for the stock market near term."(Additional reporting by Ellis Mnyandu; Editing by Leslie Adler and Maureen Bavdek)(The Stocks Outlook column appears every Sunday. Comments or questions on this one can be e-mailed to steven.c.johnson(at)thomsonreuters.com)
(c) Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.
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