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For investors, ‘not so bad’ might not be enough

While investors go into the new week believing the economy is indeed emerging from recession, they still need to see more solid evidence of a rebound.
/ Source: The Associated Press

While investors go into the new week believing the economy is indeed emerging from recession, they still need to see more solid evidence of a rebound.

The foundation for a recovery is there: Consumers are growing more confident and the housing market keeps showing signs of improvement. The latest reading on the nation's gross domestic product showed the economy was shrinking at a slower-than-expected pace during the second quarter.

The market has also taken to heart Federal Reserve Chairman Ben Bernanke's Aug. 21 assessment that the economy is on the verge of recovery.

But with an almost six-month rally leaving the Dow Jones industrials less than 500 points away from 10,000, analysts say it will now take, if not actual economic growth, then strong momentum toward that growth to extend Wall Street's gains. And this week's economic reports, including the first readings on employment and manufacturing during August, have the power to sustain or stifle stocks' advance.

"The market is at a point where if the news doesn't start becoming not just less bad, but become fairly positive, the market is going to start selling off," said Ben Halliburton, chief investment officer of Tradition Capital Management in Summit, N.J.

The most anxiously awaited piece of data his week is the government's employment report. Investors know it won't show signs of growth because job losses tend to continue even after a recovery has started. But they want to see more signs that employers are cutting fewer jobs. Economists surveyed by Thomson Reuters expect another 220,000 jobs were lost, down from 247,000 in July.

Any disappointments when Friday's report comes out, and investors' faith in the economy — and in the bets they've placed since early March — may be shaken.

Conversely, if data show a huge drop in job cuts, investors are likely to be buying.

"That's going to be a biggie. That could be a pivot point," said Maury Fertig, chief investment officer at Relative Value Partners in Northbrook, Ill.

Of course, the employment report is a concern because consumers who have lost their jobs or who fear being fired have curtailed their spending dramatically. Investors are worried that Americans won't relax enough to help the economy recover.

The week also brings a reading on consumer spending, in the form of major retailers' August sales reports. July's business was slow, raising concerns about the holiday shopping season, and there have been mixed readings on consumers' state of mind since then.

"Without people working, you don't have people buying," Tradition Capital Management's Halliburton said. "We are definitely in a weak situation."

All the major market indexes, including the Dow and the Standard & Poor's 500 and Nasdaq composite indexes, rose less than half a percent last week. The rally, at least for now, appears to be on hold as investors, uncertain about the economy's direction, await this next batch of data — a pattern that stocks have periodically fallen into.

The week's reports also include two from the Institute for Supply Management, which will be issuing its assessments of the manufacturing and service sectors during August. The ISM's manufacturing index, being released Tuesday, is forecast to come in at 50.1, up from 48.9 in July. If it meets that projection, it would be a significant change, as readings above 50 mean the sector is expanding.

The manufacturing report includes key components such as production and new orders, which the market looks at for signs of how industrial companies are likely to fare in the near future.

The service sector report, scheduled for release Thursday, covers retailers, financial services, transportation and health care. The service index is expected to have risen to 48 from 46.4.

Investors will also get a read on housing, with the Commerce Department's report on construction spending and the National Association of Realtors' pending home sales numbers expected Tuesday.

Analysts generally say that no matter what the data shows, big, sustained losses in the market are unlikely because there is still enough cash on the sidelines ready to buy up stocks if there's a dip.

"A lot of people have been afraid of this market and are afraid to jump in," said Ray Harrison, principal of Harrison Financial Group in Citrus Heights, Calif. "Regardless of the news, they are going to have to get back in at some point."