After last week's dreary economic news, Wall Street is more certain than ever that it is facing a recession. But it's also seeing signs that corporate America is enduring the difficulties better than it anticipated.
With the Federal Reserve's interest rate meeting this week and second-quarter earnings still pouring in, investors are trying to decide whether the stock market is at a turning point, or just another plateau before the next big selloff.
The stock market was volatile last week. Investors were relieved to see some decent earnings, as well as moves by Ambac Financial Group Inc. and Merrill Lynch & Co. to rid their balance sheets of risky debt. But they were disappointed about sluggish gross domestic product growth in the second quarter, and a rise in unemployment to 5.7 percent last month.
The Dow Jones industrial average, after logging several triple-digit, back-and-forth swings, finished the week down 0.39 percent. The Standard & Poor's 500 index ended up 0.21 percent, and the Nasdaq composite index finished up 0.02 percent.
The Fed meets Tuesday, and policymakers are expected to keep interest rates steady at 2 percent, given the recent underwhelming readings on the economy. Inflation rose sharply for businesses in June as they paid higher prices for commodities, but it appears to have eased in July as the price of oil retreated in the second half of the month.
"A glimmer of hope is that we've moderated some of those input costs," said Michael Strauss, chief economist at Commonfund. "There's a difference between $147-a-barrel crude oil and $127-a-barrel crude oil."
Still, few market participants expect the Fed to get too complacent about inflation; there is no guarantee that commodities costs will keep going down, particularly if the economy stabilizes.
"I think every Fed official would be likely to conclude that inflation pressures would be in danger of rebounding if the economy started to come back," said Stuart Schweitzer, global markets strategist at JPMorgan Private Bank.
Although financial stocks have been rebounding lately — the S&P 500 financial sector index is up 6.4 percent over the past month, outpacing the rest of the market — worries about the banks, brokerages and insurers remain. Merrill Lynch and Ambac did sell off much of their distressed debt, but at huge losses.
"The amount of clean-up left to do likely depends on house prices," Schweitzer said. "I think it's premature to conclude that the worst is over for the housing market."
Falling home prices, along with the tight credit markets, affect banks because many of their assets are securities tied to mortgage payments. Some borrowers are walking away from their mortgages because their home prices are falling below the amount that they owe. Other borrowers are unable to pay because of rising adjustable mortgage rates and other economic factors.
The job market will also influence credit trends for consumers, not to mention their spending levels. Consumer spending accounts for the majority of U.S. economic activity. Last week, the Labor Department said unemployment claims in the prior week soared to a five-year high — so this Thursday's weekly jobless claims figure will be of particular importance to Wall Street.
"Investors are going to be very wary of any indication of further deterioration in the labor market," Schweitzer said.
Other economic data this week include the Commerce Department's report on personal income and spending for June; the Institute for Supply Management's July index of service sector activity; the National Association of Realtors' pending home sales report for June; and the Labor Department's second-quarter reading on worker productivity.
In earnings reports this week, companies such as Cisco Systems Inc., Procter & Gamble Co., American International Group Inc., Freddie Mac, and Sprint Nextel Corp. release their quarterly results. If those and other reports surpass Wall Street's expectations, the market has a chance of finding some support.
"The market feels broadly like it is in a stabilization process," Schweitzer said. "Volatility continues and probably will, but it feels as though much of the bad news on the economy — although it is continuing — may already be reflected in the level of share prices."