Stocks will start the second half of 2008 staring into the jaws of a bear market.
At Friday's closing bell, it looked like there was little relief in sight from runaway oil prices and the lack of reassurances from bank about their already gloomy outlooks.
Investors will face a blitz of economic data in the holiday-shortened week, with the marquee number coming in Thursday's payrolls report for June.
Recession fears are rising with crude oil's dizzying spiral to a succession of record highs and the relentless stream of forecasts for more bank write-downs. When the second quarter ends on Monday, the U.S. market may finish June with its worst monthly percentage decline since September 2002.
"The combination of a banking system that is on its knees and high commodity prices is just making investors nervous,'' said Ray Rund, managing director and head of research at Shaker Investments in Cleveland, Ohio. "Even though we are not technically in a recession, it certainly feels that way.''
U.S. oil futures shot up to a record high just a penny shy of $143 a barrel on Friday—wrapping up a week when the president of OPEC predicted that oil prices could rise as high as $170 in the coming months. Gold hit a one-month high.
The Dow Jones industrial average finished the week down 4.2 percent, while the Standard & Poor's 500 Index slid 3 percent, and the Nasdaq Composite Index dropped 3.8 percent. It was the worst week for the Dow and the Nasdaq since February 10.
Shrinking Payrolls, Slower Factories
The outlook for the U.S. job market is grim, based on forecasts for Thursday's payrolls report. Economists polled by Reuters expect a loss of 60,000 jobs in June, compared with a decline of 49,000 in May. The U.S. unemployment rate, however, is predicted at 5.4 percent, a slight improvement from May's 5.5 percent, which was the highest since October 2004.
Thursday's data will include the Institute for Supply Management's June reading on the vast services sector—a day before the market closes for the Independence Day holiday on Friday. The ISM service-sector index is pegged at 51.0 in June, compared with 51.7 in May, the Reuters poll showed.
On Tuesday, two reports will get scrutiny: the ISM's June index on the U.S. manufacturing sector and U.S. car sales.
The ISM manufacturing index is forecast at 48.6 in June, down from May's 49.6, with a reading under 50.0 signaling contraction, the Reuters poll showed.
Gasoline prices at $4 a gallon are slashing the demand for gas-guzzling sport utility vehicles. This week, the stock of Dow component General Motors plummeted to a 53-year low after Goldman Sachs cut its rating on GM to "sell" and warned it would have to raise capital.
Domestic car sales probably declined in June to an annualized pace of 5.29 million units from May's rate of 5.36 million, while domestic truck sales are predicted to have slowed to an annualized rate of 4.92 million in June from May's 5.12 million, the Reuters poll showed.
The ADP National Employment Report, a private employment survey, is due out on Wednesday, along with a report on May factory orders. In contrast, earnings reports will be sparse.
Any data that shows some life in the economy will help relieve some concerns for investors, analysts said.
But the market is eager to see that the impact of the credit crisis on banks is abating before there can be any meaningful rebound in stocks.
More Maalox Moments Ahead?
Adding to investors' queasiness is the Federal Reserve's decision this week to take a break from cutting interest rates as the threat of inflation becomes more ominous.
To analysts, the Fed's growing discomfort with inflation suggests that it may choose to put its worries about growth on the back burner and focus instead on price stability.
The Fed on Wednesday left its benchmark fed funds rate at 2 percent, breaking a cycle of cutting its target rate for overnight bank loans by 3.25 percentage points since mid-September 2007.
"My personal opinion is that we could test 11,100 on the Dow in the next couple of days,'' said Victor Pugliese, director of listed equity trading at Broadpoint Securities in San Francisco. "I think the market still trends down and if we can hold at the 11,000 or 11,100 mark, somewhere in there, there's a chance we can get a bear market rally for a few days.''
During Friday's session, the Dow briefly tipped below the threshold that market technicians define as a bear market, falling more than 20 percent from its record closing high set last October.
A bear market is marked by a prolonged period of falling stock prices. It is not considered official unless there is a market close of 20 percent below the most recent closing high.
The Dow Jones industrial average hit its lowest daily close in 21 months on Friday—less than 15 points away from ending 20 percent below its record finish on October 9, 2007.
"Considering that the Dow is at its lowest since 2006, the question is whether the S&P, Nasdaq and the Russell 2000 will follow the Dow in breaking March and January lows,'' said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
"The path of least resistance is down and those indices will follow the Dow down in breaking those levels. Whether this happens next week, or the following or even next month, I don't know. I don't know when it's going to happen. I just know it's going to happen.''
Notable earnings reports next week among S&P 500 companies will come from tax preparer H&R Block on Monday, for-profit education company Apollo Group on Tuesday and super-discounter Family Dollar Stores on Wednesday.
Also set to command attention next week are speeches on the economy by two key Fed officials: Federal Reserve Bank of Atlanta President Dennis Lockhart is scheduled to give brief remarks at an event on Tuesday evening in Washington, D.C., while Federal Reserve Board Governor Frederic Mishkin speaks on Wednesday in Israel.