Some key economic reports due this week are sure to fuel the debate about whether the U.S. stock market has discounted all of the good news.
TO MANY ANALYSTS, recent data have confirmed that the economy is on the mend and corporate profits are sure to follow. Nevertheless, the Wall Street rally that started in mid-March hit a major speed bump last week that left many wondering what comes next.
A surprising dive in the dollar and an unexpected cut in OPEC oil production dealt a double whammy to the stock market, sending the Dow industrials down about 3.4 percent this week. Other market gauges posted steeper declines.
“The big issue (this week) will be the dollar and how it performs and behaves in the markets,” said Hugh Johnson, chief investment officer at First Albany Corp. in Albany, New York.
While a lower dollar helps U.S. exporters sell products and adds to profits, it can also send a signal to foreign investors to pull out of the U.S. financial markets.
Johnson is worried that the United States and Japan are in disagreement.
“If the Japanese were to intervene to drive the yen down and the dollar up, despite being urged not to, that is likely to lead to some retaliation,” Johnson said. “When you get into an ’each man for himself’ type of environment, that is not good for stocks.”
To be sure, the currency markets were calmer by the end of the week as the dollar drew some support from an upward revision in the second-quarter gross domestic product to an annual growth rate of 3.3 percent. A month earlier, the growth rate was pegged at 3.1 percent.
But a University of Michigan survey of consumers showed confidence slipping in September.
CONFIDENCE, JOBS AND CAR SALES
This week’s calendar of data includes the Conference Board’s report on consumer confidence due on Tuesday. That report often tracks the University of Michigan report.
The week’s big numbers will be the payrolls and the unemployment rate due on Friday. Economists polled by Reuters expect the jobless rate to edge up to 6.2 percent from 6.1 percent. A small decline in non-farm payrolls is expected for September.
The markets will not necessarily be holding their collective breath waiting for the jobs report. Data on manufacturing from the Institute of Supply Management are due on Wednesday. The ISM index for September is expected to rise to 55.0 from 54.7 in August, according to economists polled by Reuters.
Auto and truck sales, also due on Wednesday, will be closely watched. Auto sales are expected to hit a 16.6 million seasonally adjusted annual rate, down from August but still considered a healthy pace.
Wayne Reisner, senior managing director at New York money manager Carret and Co. LLC, believes the recent stock market rally has reflected the improvement in gross domestic product and in corporate profits.
“I think the third quarter will be pretty good in terms of earnings reports with a 12 to 15 percent increase in corporate profits,” he said. “The question is whether that is already being discounted and whether companies will make enough positive statements that show solid growth and continued improvement.”
DIVIDENDS ON THE RISE
The week’s slate of earnings reports is fairly light, with the big deluge of earnings reports to come later. Retailers J.C. Penney Co. Inc. and Walgreen Co. kick things off early in the week.
While investors are preoccupied with upcoming earnings reports and the havoc that an unstable dollar can cause, Frederick Taylor, chief investment officer at U.S. Trust Corp., says many may be overlooking the good news that has come in the form of higher dividends.
There have been 171 dividend increases and initiations among the companies in the Standard & Poor’s 500 this year, compared with 113 last year, he said, citing recent data.
“I think it’s a phenomenon that will continue for the rest of the decade,” he said.
Taylor suggests that investors focus on companies that pay a dividend of about 2 percent or 3 percent and have the capacity to increase cash flow and to raise the payout ratio. He calls it a “double win.”
But companies that pay a higher dividend, such as Eastman Kodak Co.’s recent 6 percent yield, may be signaling problems. Kodak shares tumbled after the company said on Thursday it was cutting the dividend by 70 percent.
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