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Wall Street mulls market headwinds

As Wall Street heads into the traditionally quiet Thanksgiving holiday week, most investors expect stocks to pull back. But some analysts are asking if investors will stay on the sidelines indefinitely.
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As Wall Street heads into the traditionally quiet Thanksgiving holiday week, most investors expect stocks to pull back a little, continuing a retreat seen over the last few weeks. Given the potential headwinds facing the market, however, analysts are asking if investors will stay on the sidelines indefinitely.

After a dramatic run-up that began in mid-March and was built on investors’ hopes for a full economic recovery, the main U.S. stock indices have recorded five down days in the last seven trading sessions, retreating from year-long highs hit in early November.

Most analysts had expected to see stocks give back some ground after such a strong performance this year, but some are now worried more sustained selling lies ahead.

They say the monetary and fiscal stimulus that has driven the market higher this year is likely to run dry in 2004 — adding that stocks look now overvalued, so traders are likely to cash in on their beefy gains for the year. Many Wall Street firms close their books at the end of November.

Other Wall Street pundits remain bullish, saying the unfolding economic recovery, evident in a recent wave of robust economic data, is a force that’s likely to continue to drive stock prices higher.

“The naysayers out there are saying we’ve fired the bullet and the effect won’t last,” said Steve Massocca, head of trading Pacific Growth Equities. “Those who dispute this say the monetary and fiscal stimulus will still have a salubrious impact in 2004. That’s the debate.”

Stocks erode fall gains
Stocks spent last week eroding the gains made in late October and early November, leaving them barely changed over the past month.

Still, the Standard & Poor’s 500-stock index, a closely-followed barometer of the over stock market, is up almost 18 percent so far this year, while the Nasdaq Composite index, a measure for the broad technology sector, has risen an impressive 42 percent.

Given its lofty level, the market is likely to pull back a bit more before it can move much higher warned Alfred Goldman, chief market strategist at A.G. Edwards.

“In a good market, stocks tend to do well in a shortened week, but my gut tells me we have a few days of downside ahead of us going into Thanksgiving,” said Goldman. “The pull back will be moderate and I’m looking for a year-end rally,” he added.

November and December are usually good months for stocks Goldman added, noting that over the last 52 years the market has moved higher in those months 81 percent of the time.

Despite this impressive statistic, a number of potential stumbling blocks remain for stocks, Goldman said. These include an unforeseen slowdown in economic activity, a sudden rise in interest rates and a growth in American trade protectionism.

Speaking in Washington, D.C., last week, Federal Reserve chairman Alan Greenspan said that “emerging protectionism” is becoming increasingly visible and warned that the flexibility of the global economy could be harmed as a result.

The comments came as trade tensions between the United States and China escalated, with the Bush Administration placing import quotas on certain Chinese textile products sold into America. The United States is already at odds with the World Trade Organization over steel tariffs.

Trade disputes may have a negative impact on U.S. stocks with large market capitalization said Joseph Quinlan, chief market strategist at Banc of America Capital Management. They are the sorts of U.S. companies with direct exposure to overseas markets, Quinlan said in a CNBC interview.

The technology sector, one of the most global business sectors in scope, is also vulnerable to international trade disputes, he added.

Terrorism a moderate concern
Jitters over an unwelcome rise in global terrorism and the dollar’s recent slide may also keep the market from making any real headway in the next few sessions, analysts say, pinning stocks near the 2003 highs they hit earlier this month.

Last Monday, for example, global stock markets tumbled in reaction to a series of deadly bombings in Turkey that were purportedly tied to al-Qaida. U.S. stocks followed overseas equities sharply lower, but managed to recover most of their losses later in the session.

“The ‘fear factor’ is on the rise,” noted Peter Cardillo, chief strategist at Global Partners Securities.

Concerns about the weaker dollar are leading investors to prolong the market’s pullback by moving to the sidelines of the market, Cardillo added in a note to investors.

“Is the positive market’s sentiment fading? We don’t think so,” he added, noting that investors’ fears “should soon subside, paving the way for a year-end rally.”

While it is an important topic for Wall Street, Steve Massocca doesn’t think terrorism and geopolitical unrest will have a significant impact on the U.S. stock market.

”[These acts of terrorism] are a weight for the market and a concern, but as terrible and awful as they are, as long as they happen far away from the United States they are not having a huge impact on our stock market,” Massocca said.

However, a rise in terrorism may be a problem for Wall Street if it forces the Bush Administration out of office next year, Massocca noted. It would be a negative for the stock market, he said, because Wall Street prefers a Republican administration since the party is thought to be friendlier to business.

“The market believes the Bush administration’s fiscal and monetary stimulus, which has driven the 2003 stock rally, would not be prolonged by a Democratic administration,” he said.

Flood of data expected
With no major corporate earnings on tap during the abbreviated trading week, economic data will once again be the focus of traders.

On Tuesday, the government issues its first revision of third-quarter U.S. gross domestic product, or GDP. Also due for release: October existing U.S. home sales and the Conference Board’s reading of U.S. consumer confidence in November.

The flow of data will increase dramatically on Wednesday, when a flood of economic reports — including October durable goods orders, Chicago-area manufacturing, personal income and consumption, weekly jobless claims and new U.S. home sales — is expected.

Steve Stanley, an economist RBS Greenwich Capital, said Tuesday’s consumer confidence report could move stock prices, as it is likely to reflect investors’ reaction to upbeat GDP and October unemployment data released in early November. But he added that most trading desks will be thinly staffed this week, so investors’ reactions may be muted.

“Even though lots of data will come out, I’m not sure the market will get all that excited,” Stanley said. “The more important data will come the following week,” he added, including the ISM’s report on November manufacturing and retailers’ preliminary reports on how the pivotal holiday shopping season is faring.

The day after Thanksgiving marks the official start of the holiday shopping season and is one of the busiest shopping days of the year. Retailers often refer to the day as “Black Friday” because it is when their balance sheets move out of the red and into the black.

Thin trading volume is expected this week, as the U.S. financial markets will be closed on Thursday for Thanksgiving Day and the Bond Market Association has recommended shortened trading hours on the days before and after the Thanksgiving holiday.

Reuters contributed to this story.