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Market Insider: Economy's Illness Keeps Spreading

Like anxious relatives in a hospital room, investors have been watching the economy get sicker and sicker with new symptoms surfacing daily.

Going out of business
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Going out of business

That trend is likely to stick in the week ahead, and the stock market should stay volatile as it reacts to economic news, including Friday's retail sales report. The economic calendar though is fairly light, but there are earnings reports from major retailers. Those numbers should only confirm that the holiday shopping season is shaping up to be one of the weakest in years.

Many economists have been expecting the current quarter to show this recession's biggest decline in GDP. A batch of weak data and growing unemployment has made it seem especially bleak.

"I think you can kiss Christmas goodbye this year," said BlackRock Vice Chairman Robert Doll in a phone interview on the market and economy the past week.

Doll said the economy had been "iffy" for the first eight months of the year, and companies were on the fence about hiring. But after the Lehman bankruptcy, the economy "went off the cliff" and companies starting chopping their workforces, which hurts investor and consumer confidence.

In the coming week, the global credit crunch is back in focus as world leaders head to Washington for next weekend's meeting on global financial markets and regulation. Traders are also watching as President-elect Barack Obama meets with President George Bush Monday. There is some expectation the president elect could identify a new Treasury Secretary in the days ahead of the G-20 weekend meeting.

Markets Mayhem

Stocks in the past week fell about 4 percent, after several days of ripping volatility. They are now 40 percent from their highs of October, 2007. The Dow ended the week at 8,943, down 381 points, and the S&P 500 finished at 930, off 38 points.

Doll said the stock market appears to be forming a bottom.

"Whether it's now or in the future who knows. Most bottoms have to be tested," he said.

"We do have a severe recession. I do believe we discounted most of it, but until we get further into it we've got to do backing and filling."

Doll said there are some good signs of progress being made in credit markets.

"I think healing is taking place. When you have Libor improving, Ted spread improving ... mortgage rates are coming down. Commercial paper is working again," he said.

"One of the first reasons we all sold stocks was this fear of the system failing. You're getting more of a credit thaw," he said.

Doll said, for now, he expects the S&P 500 to stay in the 840 to 1040 range.

"Then next year, we'll start getting some more definition on what this new (Obama) Administration is about. Hopefully that clarity is going to help, and we'll size up how long and deep this recession is going to be."

He said the type of stocks to buy are companies that have economic independence, decent balance sheets and excess cash flow. He likes big blue chip growth, health care and some tech.

"You have to make sure the companies you have can take the hard times" he said.

Going into the end of the year, he said the market may regain some ground.

"I think we'll get some sort of year end rally," he said.

Car Wreck

In the coming week, investors will also be watching the vital signs of the auto industry. Both Ford and General Motors reported huge lossesand GM warned that its cash level is closing in on the minimal level it needs. GM also called off merger talks with Chrysler so it could focus on its financial health. The Big Three are asking Washington for funding.

The woes of the industry go hand in hand with concerns that job losses are mounting and the auto industry's ills could speed that trend, crimping the economy even further. John Kilduff, senior vice president at M.F. Global, said that GM's health is a concern too in the energy markets, where the economic slowdown has weighed heavily on the price of oil.

"A GM bankruptcy is certainly something that would break the back of $60 (per barrel) oil and take it lower," he said.

Oil Drill

Oil fell $6.77 or 10 percentfor the week to $61.04 per barrel.

"We believe we're at the lower end of a range between $60 and $68," said Kilduff. "What is already occurring is we're seeing various capital expenditures and investment programs go by the boards."

Kilduff said there's a false sense of comfort in the falling oil prices. He said the fact that the industry is scrapping projects is not a good sign and it could put upward pressure on prices in the future. For instance, Saudi Arabia and Conoco shelved a project to build a refinery to process the heavy Saudi crude.

"It was going to be a 400,000 barrel per day plant," he said. It is now put off for several years.

"When things turn around, America's oil crises will be right back in our faces," said Kilduff, a CNBC contributor.

Econorama

The dollar fell 0.14 percent against he euro in the past week, to a level of $1.2763. The dollar was off 0.2 percent against the yen.

Brian Dolan, chief currency strategist at Forex.com, said the dollar could get a lift at the beginning of the week when there is data from Europe and the U.K. and little from the U.S. Tuesday is Veterans Day and the bond market is closed.

But by the end of the week, the greenback could be under pressure as jobless claims and retail sales data are reported.

Dolan said markets will focus on the meeting in Washington next weekend. But as far the new Administration, he said markets now do not expect much action ahead of January. President-elect Barack Obama spoke Friday, saying he would not get in the way of the current Administration. He did call for a fiscal stimulus package and help for the auto industry.

"We just got the impression that there's not going to be some shining knight riding to the rescue in the next couple of weeks and markets are going to be left to twist in the wind into early 2009," said Dolan. He now expects renewed downside volatility in stocks, renewed weakness in the euro and in yen crosses.

More From CNBC.com ...

There's just a few data points in the week ahead and one of the most interesting items will be retail sales for October, released on Friday. On Tuesday, the NFIB's small business survey is released. On Thursday, weekly jobless claims are released, as is international trade data. On Friday, import prices for October, business inventories for September and consumer sentiment are also released.

Fed Chairman Ben Bernanke is scheduled to speak Friday at the Fifth European Central Bank Banking Conference on policy coordination among central banks. That meeting is in Frankfurt, Germany. European Central Bank President Jean Claude Trichet is scheduled to speak at the same event.

On Wednesday, Fed Vice Chairman Donald Kohn speaks on productivity and innovation in financial services in Luxembourg. Minneapolis Fed President Gary Stern speaks that day at the Minnesota Women's Economic Roundtable in Minneapolis.

Philly Fed President Charles Plosser discussed the economic outlook and regulatory issues raised at the Economic Club of Pittsburgh at noon, and Stern speaks with local business leaders in Winona, Minnesota.

Earnings Central

Retailers reporting in the week ahead include TJX , Tuesday; Macy's on Wednesday, and Wal-Mart , Kohl's and Nordstrom Thursday. Abercrombie and Fitch and J.C. Penney report Friday.

Other companies reporting in the week ahead include Nortel , Allianz , Tyson Foods early Monday, and AIG and Starbucks after the bell that day. On Tuesday, Brazil's Petrobras reports. Wednesday's earnings reports include Thomson Reuters , Applied Materials , and Computer Sciences .

Agilent and Telefonica report on Friday.

Important drug company news will come from the American Heart Association meeting in New Orleans this weekend. On Sunday, AstraZeneca releases results of a widely anticipated trial on its cholesterol drug, crestor.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC's Senior Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.