Wall Street’s steep gains in the final days of October are leaving some investors optimistic that the market has put its scariest days behind it, but they’re still wary about the landmines that could send stocks reeling again.
Tuesday’s presidential election could help erase some unknowns over how the power structure in Washington will affect investors, but pressing economic questions could ultimately shape the week. Reports due on manufacturing, the service sector and, most important, employment, could determine whether the market stays above its mid-October lows and holds on to some stability or plumbs new depths.
Sunday evening, stock index futures signaled a moderately lower open. Dow Jones industrial average futures fell 31, or 0.33 percent, to 9,267. Standard & Poor’s 500 futures fell 4.30, or 0.44 percent, to 963.00 and Nasdaq-100 futures fell 4.00, or 0.30 percent, to 1,333. The market’s volatility in September and October, however, has made futures a less reliable indicator of how the market will indeed open.
Some analysts believe Wall Street’s wild ride is not yet over.
“There is a saying that bear markets end in exhaustion,” said Axel Merk, portfolio manager at Merk Funds, suggesting the market doesn’t appear at that point. He notes that day traders who profit from the dizzying turns in the market have not yet been forced out, a sign that stocks could continue to bounce around and see more late-day selloffs.
To carve out a sustained advance, Wall Street will need to look past dispiriting signposts about the economy, he said.
“If the market reacts positively to bad news that would be a very positive sign,” Merk said, noting that Wall Street will have to grow numb to a chorus of downbeat reports about the economy and advance to make clear it is looking toward a recovery. Last week, investors did manage to write off some weak readings on personal spending and consumer confidence.
There are other positives emerging, Merk and other analysts note: Some sources of selling pressure are easing as nervous investors abandon the market and because Friday marked the end to the fiscal year for mutual funds whose selling for tax reasons weighed on the market.
The chief worry that set off the market’s year-old decline, the housing market, remains, Merk noted.
“We haven’t seen the bottom yet in the housing market and ultimately that’s the problem and if the housing market continues to slide, banks will need another round of capital,” he said, referring to government money that last week began flowing to some banks.
Washington is now mulling ideas to help prevent millions of homeowners avoid foreclosure but any plan is likely to be contentious.
It was fears about banks’ troubles with bad mortgage debt and weakness in the overall economy that left October as the worst month on Wall Street in 21 years. The Dow Jones industrial average fell 14.1 percent and the broader Standard & Poor’s 500 index lost 16.9 percent as the panic over a now-easing freeze in credit markets shifted to fears of an acute recession.
The damage in October would have been far worse, however, if it weren’t for last week’s surges of 11.3 percent in the Dow and 10.5 percent in the S&P 500. That was a marked reversal from the second week of October when stocks plunged 15.3 percent, at the time accounting for 40 percent of the market’s losses for the year.
Investors are hoping the Dow can continue to trade above its Oct. 10 close of 8,451.19, its lowest finish since April 2003. Similarly, the S&P 500 recorded a low on Oct. 10 of 899.22. The market has since remained above those levels, giving some observers hope that a market bottom is in place.
But even with the partial snapback last month, it’s impossible to know whether the market, down 38 percent from its October 2007 peak, has adequately priced in the effects of a tough economy.
Georges Ugeux, chairman and chief executive of Galileo Global Advisors, contends troubled debt from credit cards, for example, could emerge as a heightened worry for Wall Street as the economy slows.
He said that while the money being deployed by governments around the world to stabilize banks provides a big safety net, some of the market’s biggest professional risk-takers — hedge funds — could still unnerve the markets if they’re forced out of business or into more of the heavy selling that occurred in October.
“I think in the coming weeks what we are going to see is something that will look like a bloodbath in the hedge funds,” said Ugeux.
Hedge fund investors tend to be wealthy individuals or institutions such as pension funds that in recent years relied on their funds to boost returns through the use of complex financial instruments such as derivatives that have now fallen out favor.
Still, Ugeux said October’s end was a clear improvement for the market and that a more sober evaluation of economic risks by the market could make for a somewhat smoother ride.
“Fundamentally, October was some kind of an aberration. It was sheer panic, people going in any direction,” he said.
While the markets showed more orderly trading of late, this week brings a rush of economic data that could unnerve Wall Street if it points a difficult recession. Additionally, quarterly results are expected from Cisco Systems Inc., Goodyear Tire & Rubber Co., Time Warner Inc., Sprint Nextel Corp. and Walt Disney Co.
On Monday, the Commerce Department issues a report on construction spending while the Institute for Supply Management, a private research group, releases data on the manufacturing sector. Major automakers report U.S. sales.
Tuesday brings a Commerce Department report on factory orders and on Wednesday the ISM issues a service sector report.
On Thursday, retailers report October sales results expected to be disappointing as consumers, the drivers of the economy, cut back their spending.
Friday brings what is widely seen as the week’s most important report, the Labor Department’s October employment figures. Wall Street remains nervous that jumps in unemployment will erode confidence in the economy and cause nervous consumers, even those still employed, to pare their spending. That is a worrisome prospect as consumer spending accounts for more than two-thirds of U.S. economic activity.
And anxiety about troubles at marquee companies, like struggling automakers General Motors Corp. and Chrysler LLC, could further weigh on investor sentiment. Layoffs there, for example, would not only hurt the economy but also likely deal a psychological blow.