Image: NYSE trader
Henny Ray Abrams  /  AP
After stocks stumbled last week on disappointing reports on housing and manufacturing, investors are concerned that the economy's rebound will be slower than originally thought.
updated 9/27/2009 7:18:48 PM ET 2009-09-27T23:18:48

Investors are just not sure where the economy is headed. And so the stock market may be in limbo for a while.

After stocks stumbled last week on disappointing reports on housing and manufacturing, investors are concerned that the economy's rebound will be slower than originally thought. They may cool their buying and even resort to more selling until they are more certain that the strength of the recovery warrants extending the nearly seven-month-long advance in stocks.

"The significant advance that the market has had ... has left some people with an itchy trigger finger," said Jim McDonald, chief investment strategist at Northern Trust.

This week, a number of data points should provide more insight. Chief among the reports is the Labor Department's monthly reading on the labor market, due Friday. Unemployment is considered one of the economy's biggest obstacles.

Investors will also get reports on home prices, manufacturing, consumer confidence, construction spending and factory orders. Beyond the economic data, investors will be watching for updated outlooks from companies ahead of third-quarter earnings reports next month.

As the quarter comes to a close, this is the time when companies may signal how well they have been faring and what their expectations are for the remainder of the year.

Video: Will Wall Street’s rally continue? "Typically stocks will be soft going in to the actual earnings reports," McDonald said, noting that stocks pulled back about 7 percent during the four weeks leading up to second-quarter earnings season this summer.

The stock market sold off last week, weighed down by unexpected drops in home sales and durable goods orders, as well as tumbling commodity prices. Investors looked past a better-than-expected report on unemployment and an improvement in consumer sentiment. A more upbeat assessment of the economy from the Federal Reserve also wasn't enough to stoke buying.

For the week, the Dow Jones industrials fell 1.6 percent, the Standard & Poor's 500 index lost 2.2 percent and the Nasdaq composite index slid 2 percent.

Though the Fed kept its benchmark interest rate at a record low of near zero, and signaled that it plans to keep rates low for some time, the central bank is starting to wind down other stimulus programs. The Fed plans to slow its purchases of mortgage-backed securities and also reduce two emergency lending programs. A first-time home buyer's credit is set to expire in November.

Investors are worried that the economy's nascent recovery could falter without continued government support.

Major Market Indices

"It's quite clear that some of these stimulus programs have had a favorable impact on the economy," said Ward McCarthy, chief financial economist at Jefferies & Co. That could "create the potential for some disappointment in the months ahead when these stimulus programs expire."

The market has been on a fairly steady climb higher since hitting 12-year lows in early March. With the Standard & Poor's 500 index up 54.4 percent since then, many analysts have been warning that the market will inevitably retreat, and perhaps see more selling than the periodic pullbacks like the drop stocks suffered in June.

What may ultimately lift the market is the fact many investors are still not in the market and may want to get in for fear of missing another rally.

"On the bullish side, we have all this cash and people looking to get in on the dips, but on the bearish side, this market has run so much ahead of the fundamentals," said Tyler Vernon, portfolio manager at Princeton, N.J.-based investment management firm Biltmore Capital Advisors.

Analysts say last week's decline doesn't necessarily mean the market's sentiment has changed. If anything, investors have come to accept that some of the economic data, especially on the labor front, will be weak for the foreseeable future.

The number of people who lost their jobs in August slowed from the previous month, but the unemployment rate swelled to 9.7 percent, the highest level since June 1983. Many analysts are expecting the unemployment rate to climb to at least 10 percent by the end of this year.

"We have to understand that we're in the early stages of a recovery and in the early stages of a recovery the data tends to be mixed for the simple reason that ... not all sectors or regions of the economy recover at the same time," said Jefferies' McCarthy.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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