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Cautious week for Wall Street

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Stock prices may come under some pressure this week, or drift sideways, market watchers say, as investors mull over a bunch of economic reports, a one-day policy meeting of the U.S. Federal Reserve and the first hints of how third-quarter earnings season will pan out.

The stock market's major averages closed last week basically flat. On Friday, as a soggy retail sales report raised fears about the pace of the economic recovery and led some on Wall Street to ask if the stock market’s robust, six-month rally is now overdone.

Analysts say so-called earnings warning season, when companies tell Wall Street if their quarterly numbers will hit or miss analysts’ targets, will give investors guidance on the strength of the economic recovery.

Third-quarter earnings warnings are expected to begin in earnest this week and the early indications are upbeat. The ratio of negative pre-announcements to positive ones is running slightly better than normal according to earnings research firm Thomson/First Call.

Upbeat 3Q earnings seen
So far this year, earnings results have beaten analysts’ projections, and the trend is likely to continue into the third quarter, with Thomson predicting third-quarter earnings will do “quite well” relative to expectations.

The earnings picture being painted for the third quarter “won’t be a masterpiece, but it will still be pleasing to look at,” noted Thomson’s Director of Research Chuck Hill.

Most of the year-over-year growth in the quarter is expected to come from the energy, technology and financial sectors, according to Hill. Laggard sectors will include consumer stocks, utilities and industrials.

Still, market watchers like Peter Cardillo, chief markets strategist at Global Partners Securities, reckon the onset of pre-announcement season, which hits its peak over the next few weeks, could give investors a reason to sell stocks, especially given the market’s strong performance over the summer months.

The broader stock market, as measured by the Standard and Poor’s 500-stock index, is up over 25 percent from its March 11 lows.

The blue-chip Dow Jones industrial average closed up for the sixth-straight month in August, and the Nasdaq Composite index, which tracks the broader technology sector, saw its seventh monthly rise in August and hit a 17-month high last week.

“As a rule of thumb, over the past year companies that are going to disappoint Wall Street usually come out with their pre-announcements earlier in the season, so we could get some warnings that weigh on the market,” Cardillo said. “This could be a catalyst for a pull-back of between 3 and 5 percent — nothing too serious.”

Cardillo said he doesn’t expect a spate of sour warnings to derail the stock market’s advance. “It’s just that as we approach the end of September some negative commentary from firms could give investors an excuse to do some selling,” he continued. “On balance, I still think we’re headed for a solid third quarter.”

Fed may be an anticlimax
Investors will have a feast of economic data to chew over this week as well.

Industrial production data for August and business inventories for July are expected early Monday, the U.S. August Consumer Price Index report is due for release on Tuesday, and Thursday brings the weekly jobless claims report, the Conference Board’s Leading Indicators report for August and the Philadelphia Federal Reserve’s September business conditions survey.

But most on Wall Street will pay closest attention to Tuesday’s one-day policy meeting of the U.S. Federal Reserve’s Federal Open Market Committee.

Central bankers are expected to keep U.S. interest rates unchanged at 45-year lows and signify their intention to keep them low for the foreseeable future, as they did at their last meeting in August, according to Steve Stanley, an economist at RBS Greenwich Capital.

“Of all the things we’ll be watching, the Fed meeting will probably be the most important event,” said Stanley. “But there is a good chance it will be an anticlimax for the stock market; the Fed’s interests will be best served by issuing the same statement as last August. And given the way the economy is, we’re not close to a tightening of interest rates.”

The Fed’s statement will be studied closely for any signs that central banker see the U.S. economy strengthening.

Investors are looking for signs of economic vigor after bullish expectations spurred a run-up in the market that began in mid-March. Most of the data released over the last few months have pointed to a growing economy, but some on Wall Street are nervous that the stock market has moved too far, too fast.

Progress in the labor market has been sluggish and for this reason Thursday’s weekly jobless claims data will be closely watched, said Stanley.

“Labor is the next big shoe to drop,” he said. “It’s disappointing that the weekly claims data have been soft and last week’s jobs report was not good. Businesses are still cautious; they want and make doubly sure this recovery is for real, but they can’t expand output forever without adding to their work forces, so I expect payrolls to turn by end of the year.”

Most of the rest of the data released this week will relate to the manufacturing sector, Stanley added, including the Philadelphia Fed’s business conditions survey. “Everything seems to indicate that manufacturing is embarking on some decent growth, so we expect most of the data this week to be healthy,” he said.

Wall Street moved lower Friday, reacting to Commerce Department data that show retail sales rose, but fell short of analysts’ estimates in August.

Another weight for the market was disappointing news from Oracle. The software giant reported Friday quarterly profit and revenue that met analysts’ expectations, but also said new software licenses fell 6 percent.