After a week of treading water on Wall Street, some investors may be wondering if the stock market can extend its spring rally into the summer.
Investors had hoped Federal Reserve Chairman Alan Greenspan’s commentary on Thursday — in which he told Congress that the economy was on the right track — would give stocks a solid boost. But with oil prices nearing $55 per barrel the same day, stocks barely finished the day higher, and then ended mixed Friday despite a strong revenue forecast from Intel Corp.
With good news having such little impact, no wonder investors are questioning the strength of the market’s May advance. However, the potential for continuing that rally remains.
Corporate forecasts for second-quarter earnings have been fairly positive so far, with many companies pointing to stronger demand and lower inventories. That bodes well for the July earnings season.
Fed rate hikes over?
And the Federal Reserve, which meets at the end of the month, could signal that its policy of modest interest rate hikes may soon come to an end. That would be a powerful sign of the Fed’s confidence in the economy.
“This is the first time in five years that we have a positive catalyst on the horizon, and that’s the Fed stopping hiking,” said Philip Dow, managing director of equity strategy at RBC Dain Rauscher in Minneapolis. “That’s going to play into the markets at some point.”
When will that play in? That’s the conundrum.
Despite Greenspan’s best efforts at easing Wall Street’s economic fears, higher oil prices and a disappointing rise in the nation’s trade deficit last week ultimately kept stocks mixed. For the week, the Dow Jones industrial average rose 0.49 percent, the Standard & Poor’s 500 index was up 0.17 percent, and the Nasdaq composite index fell 0.41 percent.
Economic reports
While the markets wrestle with the slowing economy, a pair of economic reports in the week should ease fears of inflation — if the economists’ predictions are correct.
On Tuesday, the Labor Department will release May’s Producer Price Index, a measure of wholesale prices and an indicator of inflation. The PPI is expected to drop 0.2 percent for the month, compared to a 0.6 percent hike in April. “Core” PPI, without volatile food and fuel prices included, was expected to rise 0.2 percent, compared to a 0.3 percent increase in April.
Labor’s Consumer Price Index, which measures retail prices, comes out Wednesday. May’s CPI was expected to climb just 0.1 percent, compared to a 0.5 percent jump in April. Core CPI was expected to come in at 0.2 percent, which would actually be an increase from April’s flat reading.
The predictions point to a moderation in prices, meaning that inflation is likely in check for now. If those figures come in higher than expected, however, the prospect of inflation will likely spook investors and drive stocks lower.
Brokerage earnings season
Wall Street’s brokerage houses begin their own mini-earnings season this week, with three major firms reporting. With JPMorgan Chase & Co. warning that its brokerage earnings could be weak due to the markets’ tough spring, investors will look closely at this week’s earnings to see whether JPMorgan was an isolated instance or a symptom of problems throughout the brokerage industry.
On Tuesday, Lehman Brothers Holdings Inc. will report its earnings before the session and is expected to earn $2.20 per share, up from $2.01 per share in the same quarter last year. Lehman has been one of the brokerage industry’s steadiest performers, rising 39.9 percent from its 52-week low of $67.25 on Aug. 6, 2004, to close Friday at $94.10.
Shares of Bear Stearns Cos. Inc. were also steady performers through 2004, but concerns about the company’s mix of businesses and its earnings pressured the company’s stock earlier this year. Bear Stearns is off 9.8 percent from its 52-week high of $109.85, set on Dec. 10, and closed Friday at $99.12. The company is expected to earn $2.37 per share, down from $2.49 per share in the year-ago quarter, when it reports earnings before Wednesday’s session.
Goldman Sachs Group Inc. is forecast to earn $2.05 per share, down from $2.31 per share, when it reports its quarterly results Thursday morning. While well above last year’s low, Goldman shares have been under pressure since late April, falling 13.3 percent from its 52-week high of $114.25 on April 8. Goldman closed Friday at $99.05.
OPEC ministers meet
Oil ministers from the Organization of Petroleum Exporting Countries meet in Vienna on Tuesday to discuss production, which could roil crude oil futures — and stocks — during Tuesday’s session.
In addition, no fewer than five Federal Reserve governors will be giving speeches around the country this week. With Wall Street giving the Fed such close scrutiny lately, their comments will be closely watched and could move the market if they hint at any changes in interest rate policy.