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Wall Street fretting about obstacles to stocks rising higher

Factors that could pull down stocks include dour corporate earnings, the uncertainty of the November election and the potential fiscal cliff looming.

September 04, 2012|By Stuart Pfeifer, Los Angeles Times
  • Stocks got a boost Friday when Federal Reserve Chairman Ben S. Bernanke signaled strongly that the central bank was considering additional economic stimulus despite vociferous opposition from Republicans. Above, traders work Friday on the floor of the New York Stock Exchange.
Stocks got a boost Friday when Federal Reserve Chairman Ben S. Bernanke… (Andrew Burton, Getty Images )

The stock market is within striking distance of multiyear highs thanks to one of its quieter rallies.

But as Wall Street returns from summer vacation Tuesday, analysts are less excited than nervous about how stocks will fare in what historically has been the worst month for the market.

Though share prices are higher than many experts thought possible a few months ago, bears fret that several obstacles could upset the market. They include uninspiring corporate earnings, uncertainty surrounding the November election and the looming fiscal-cliff showdown in Washington over the expiration of certain tax benefits and the automatic cuts in government spending.

Even the biggest factor working in the market's favor — anticipation that the Federal Reserve will take fresh action to stimulate the economy — underscores the basic logic that share prices are unlikely to make much more progress in the face of drab economic growth.

"Right around Labor Day is where you get somewhat of a market peak, historically speaking," said Marc Pado, U.S. market strategist at investment firm DowBull. "The reason I wouldn't be surprised to see somewhat of a pullback is we're moving closer to the election and closer to the fiscal cliff."

That hasn't slowed the market recently.

The Standard & Poor's 500 index is up 10% since June 1 and nearly 12% this year. A 7.2% advance this year in the Dow Jones industrial average has left the benchmark index fewer than 190 points away from its highest level in almost five years.

Share prices have been nourished lately by moderately positive economic data, including a respectable jobs report for July and mounting evidence that the housing market is bottoming out. The absence of big problems, especially in the European debt crisis, also has helped.

Stocks got a boost Friday when Fed Chairman Ben S. Bernanke signaled strongly that the central bank was considering additional economic stimulus despite vociferous opposition from Republicans.

The effort, a third round of what the Fed calls quantitative easing, or QE3, would involve buying bonds in the hope of tugging down interest rates, thereby spurring investment activity and consumer spending.

Bernanke offered a spirited defense of earlier stimulus programs, saying they were vital in helping lift the economy from the financial crisis. Bernanke made clear that he is chagrined by the haggard jobs market, saying Fed policymakers would like the unemployment rate to be two percentage points lower than its 8.3% reading in July.

But action by the Fed or its overseas counterpart, the European Central Bank, or ECB, would point up only that the global economy remains brittle four years after the financial crisis, said Bruce McCain, chief market strategist at Key Private Bank.

Investors are "taking the optimistic interpretation of what essentially is bad news, that the economy is so bad the Fed and ECB are going to have to intervene," McCain said. "It's kind of a bad-news-is-good-news scenario, but in a lot of sense that is not a good foundation for a lasting rally."

There also is the risk that the Fed won't act soon, which could cause investors who have bought into the market expecting QE3 to jump back out of stocks.

"The Fed does not like to be seen as political in moving right before an election," said Pado, the market strategist. "I think they'll likely hold back and not get aggressive before the election."

Analysts also are wary of the potential fiscal cliff looming at the end of the year, when sweeping federal spending cuts are scheduled to take effect and a series of temporary tax cuts, enacted under President George W. Bush and extended by President Obama, are scheduled to expire.

Last month, the nonpartisan Congressional Budget Office predicted that the fiscal cliff could push unemployment to 9% and probably trigger a recession.

Most investors expect that federal lawmakers would intervene before the doomsday scenario struck. But given the gridlock and acrimony in Washington, they fear a repeat of summer 2011, when lawmakers haggled over the U.S. debt ceiling and stocks ended up being slammed by a downgrade of the nation's credit rating.

Beyond that, there is concern about slowing corporate earnings.

A report Friday from Thomson Reuters analysts Greg Harrison and Jharonne Martis said companies have been increasingly gloomy in uncorking third-quarter profit warnings, with four negative pre-announcements for every positive one.

S&P 500 companies in the third quarter are expected to show their first year-over-year profit decline since the economic recovery began in 2009, the analysts said. That could exacerbate a potentially choppy period for the market.

"We don't think you'll be able to cruise through the fall," McCain said. "There's just a lot out there that is happening."

stuart.pfeifer@latimes.com

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