Market Insider: The Week Ahead
CNBC Executive News Editor
Like a sailing ship waiting for the wind to shift, the stock market could drift as it focuses on oil, economic data and earnings reports in the week ahead.
But any major news developments could power a volatile move in either direction.
"We're starting the week in no man's land. We might stay there until the next big piece of news tilts us one way or the other," said Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman.
"You get the jobs report. You get some more earnings. Next week will be an important week. I think GDP may surprise some people on the upside," said Rauscher. "The jobs reports have been so crazy, I don't see how they can be a good number."
Four Dow components—Disney , Verizon , ExxonMobil and Chevron—report in the week ahead, as do 118 S&P 500 companies. Jobs data for July is released Friday, and the first look at second quarter GDP is Thursday.
Oil, as usual, is one indicator everyone will be watching.
Despite the steep 4.8 per cent drop in crude in the past week, stocks retreated, as renewed fears about financial companies and the economy overturned gains.
The Dow was off 125.88 points or 1.1 percent to 11370.69. The S&P 500 was off 2.82 points for the week , just a 0.2 percent decline to 1257.76, and the Nasdaq was up 1.2 percent at 2310.53.
"I think the big question for equities right now is whether or not the July 15 low is going to hold as the low. Unfortunately, 80 percent of the answer is going to be whether or not oil stays flat or goes lower," said Thomas Lee, chief U.S. equities strategist at J.P. Morgan.
As stock investors watch crude, the oil market is watching a number of developments in the week ahead including Iran's response to the United Nations on its nuclear program. "It's a big week in terms of where Iran sits," said M.F. Global senior vice president John Kilduff, a CNBC contributor. "If they don't react positively the pressure is going to be on from Israel. The tension that surrounds this situation has been actively priced in the oil market in my view."
Diane Swonk, chief economist at Mesirow Financial, said too that Iran is a major factor in the oil picture. She is looking for an oil price of about $119 per barrel by year end, and hopes that even lower oil prices next year will be key to improvement in the economy. She said longer term changes in consumer behavior and attitudes are helping. "You really hope for some sort of stability in energy prices, back to $100," she said.
"We are getting some demand reaction," she said. "The other issue, the key issue is what's going to happen with Iran. if we can stay out of a major issue with Iran, we'll be in good shape."
News may come from Iran Monday when NBC News anchor Brian Williams interviews Iranian President Mahmoud Ahmadinejad from Tehran.
Fuel for Stocks
Oil finished the past week at $123.26, a level not seen since May. The dollar, meanwhile, gained nearly a percent against the euro in the past week. Oil has lost more than 15 percent in the last three weeks.
"$147 was a huge threat to our outlook. $120 takes us from the red zone to yellow. We're not in the green zone yet," Lee said in a telephone interview.
Lee has said stocks run into trouble when oil hits the $130 per barrel barrier. "Oil is still higher than where it was when Bear Stearns went under. It's anyone's guess where oil will find its equilibrium. It's always been tough for people to call a bottom or top in oil," he said.
"If it begins to fall, essentially it's a double benefit to the U.S. economy," he said. Lee said a serious decline in crude would also be a double negative for emerging economies. He cited a JPMorgan study that showed 80 percent of the petrol dollars in the last 12 months were were invested in emerging economies.
The key piece of data in the coming week is that employment report for July. Swonk expects to see a decline of 75,000 non farm payrolls.
Swonk said she expects the second quarter GDP to come in at 2.5 percent. She said if not for high energy prices, the number could have been 3.5 to 4 percent because of the impact of the stimulus package's rebate checks. "Those tax rebates by the end of the third quarter wind down and go away," she said. "The oil price forecast is really critical to understanding not only where we're going to be going into the holiday season, but where we are going next year."
Her third quarter estimate is 1.7 percent and fourth quarter is negative 0.1 percent. She said the holiday season could be the worst since 1991.
Other data expected in the week ahead includes the S&P/Case-Shiller home prices index and consumer confidence, released Tuesday. Wednesday's data includes the ADP employment report and oil and gasoline inventories. Weekly jobless claims are reported Thursday as usual . Q2 GDP is also reported that day, along with the employment cost index. Chicago PMI is also released Thursday.
ISM manufacturing data and construction spending are Friday, and the auto industry releases its July sales that day.
Also of note, Fed Gov. Fredric Mishkin speaks at noon Monday on the Federal Reserve's communications strategy. He speaks at the Peterson Institute for International Economics in Washington and will take questions from the audience.
The Senate was considering the housing bill in Saturday's session. Swonk said that bill will help but is not going to make a huge difference to the course of the economy. "At this stage of the game, the real issue is that we've got to go through some pain. You do want to stop foreclosures, but that's all on the margin. This market has to recover on its own," she said. The legislation was designed to aid struggling mortgage holders but also to toughen regulation and back stop mortgage giants Fannie Mae and Freddie Mac, a source of worry in the markets.
Media, telecommunications, consumer staples and energy are among the sectors reporting earnings in the week ahead.
So far, about half the S&P 500 companies have reported earnings. Excluding financials, earnings are up 7.7 percent. Sixty-eight percent of those companies have reported upside surprises.
"The good news is companies have not withdrawn guidance," this earnings season, said Lee. "Changing it is okay."
Rauscher said the quarter so far is coming in as he expected. "There's no doubt the environment is challenging. I would continue to say even with forward guidance, next quarter will be a little weaker than this one, but I just don't see evidence that the earnings are ready to roll over and collapse," said Rauscher.
On Monday, Verizon, Amgen, Loews, Kraft and Tyson Foods report. Colgate-Palmolive, Northrop Grumman, Sony, SAP, U.S. Steel, Valero and Viacom report Tuesday. Disney, Comcast, Corning, Starbucks, Visa and Arcelor Mittal are expected Wednesday. Thursday is when ExxonMobil, MasterCard, Kellogg, Motorola and Royal Dutch Shell report. Chevron, Total, NYSE Euronext, Cigna, and Clorox report Friday.