Marc Pado Comments: Wall Street May Continue Its Sideways Tango This Week - The Business Times
The Business Times, December 14, 2009
THE dark clouds of recession over the US economy continued to give way to sunnier forecasts last week, but investors were unmoved by Wall Street's rising confidence that fourth- quarter growth will be more robust than previously expected.
With the end of the year rapidly approaching, that wait-and-see mindset should prevail again this week, although several important economic reports, a Fed interest rate meeting, and even some major corporate earnings will try to push traders off the fence.
'No one's in a hurry to make a commitment one way or the other right now,' observed Cantor Fitzgerald chief strategist Mark Pado, who has seen his forecast of 10 weeks ago, reported in this column, borne out nearly to the letter.
That forecast, issued shortly before the third- quarter earnings season cranked into gear and at the tail-end of a brief swoon, predicted stocks would regain their rallying ways and then some, before a pause that would lead to mostly sideways trading for the rest of the year.
'The market has moved the way I expected because the expectations that so many investors had for the economy have proven well-founded,' he said.
'We're seeing a steady trend higher in housing and manufacturing, the jobs market is stabilising and showing signs of a recovery. Meanwhile, consumers have begun responding to this modestly positive news by starting to spend more,' Mr Pado observed.
So why has this upbeat scenario largely failed to kick the stock market into the next phase of the bull market?
There are 66 good reasons - the percentage rebound of the stock market from its March lows.
Investors' expectations for the US economy's recovery have largely been priced in to stock price valuations since the third week of October.
'We've seen a bit of an effort to move higher because economic conditions are proving to be in pretty much the best case scenario people were hoping for, but stocks are staying range-bound - between 1,000 and 1,100 or so in the S&P 500 - for the very simple reason that we've had our big rally on this scenario already, during August and September,' Mr Pado said.
He believes there is still room for stocks to end the year one to 3 per cent on either side of current levels, 'but it's going to take until we get the fourth-quarter earnings numbers, beginning in mid-January, for the market to make its next decisive move', he said.
The good news is that good things will come to those who anticipate the next move, according to Mr Pado, who is confident that the next decisive move will be upwards.
'I know a lot of people on Wall Street remain convinced that this is a bear market rally, but I don't think so. This bull market is here to stay for a while.'
Don't expect the next eight months to match the outsized returns of the last eight months, though. 'I see stocks moving pretty much at the pace of the economic recovery, and it's looking like it's going to be a pretty weak one,' he said.
In the short term, the US dollar will probably be the prime mover in determining whether that one-to-3 per cent change for the market over the final few weeks of 2009 ends on the positive or negative side of the ledger.
Since the unexpectedly strong employment report more than a week ago, the improving trends in the economic data have fuelled a bit of a comeback for the greenback, which, traders said, kept stocks from advancing last week.
On Friday, the US dollar advanced to its highest level in two months against the euro and the Japanese yen. Its strong showing kept a lid on stocks despite the good economic data.
The Dow Jones Industrials average rose 65.67 points, or 0.63 per cent, to close at 10,471.50. But the broader S&P 500 only inched ahead by four points, or 0.37 per cent, to a close of 1,106.41, while the tech-heavy Nasdaq Composite actually dipped, losing about a half of a point, or 0.03 per cent, to a 2,190.31 finish.
For the week, the blue chip index managed an advance of 0.8 per cent, the Nasdaq fell by 0.2 per cent, and the S&P 500 was even.
'There's a lot of economic data due in, but if it mostly confirms the current trends, I expect more consolidation, with the dollar continuing to strengthen and holding down the equity market,' said Joe Battipaglia, investment strategist at Stifel Niclaus.
The best potential catalyst for the market is the Fed's Federal Open Market Committee meeting.
'Everyone's expecting the FOMC's policy statement to repeat its mantra of 'we continue to expect rates to stay at exceptionally low levels for an extended period', but if there is new language focusing on improving conditions or hinting that the Federal Reserve might raise its benchmark rate sooner than anticipated, for instance, that could provoke a strong reaction in the market,' Mr Battipaglia said.
In addition to the FOMC policy statement on Wednesday, the economic calendar features the producer price index, the Empire State survey, November industrial production and the National Association of Home builders survey tomorrow.
Wednesday's headline data is housing starts, along with the consumer price index. Thursday's schedule has weekly jobless claims, leading indicators and the Philadelphia Fed survey. The day also brings the Senate Banking Committee's vote on Ben Bernanke's confirmation for a second term as Fed chairman.
Corporate earnings leap briefly back into the spotlight on Thursday, with reports due from economic bellwether FedEx, as well as Nike, General Mills and Oracle.
