Stocks head into the final day of July with the best monthly gain in a year, yet July's hot performance has only sparked debate about what August will bring.
The key data point Friday is second quarter GDP, expected to show 2.5 percent growth. Even though it's backward looking, economists have been looking forward to it for weeks as they've fine-tuned their estimates, based on a surprisingly choppy data stream.
Stocks traded wobbly Thursday. A firm open turned into a decline and a triple digit Dow loss by midday. However, the market staged a comeback, and the Dow finished the day down just 30 points at 10,467, and the S&P 500 was 4 points lower at 1101.
"The market was able to stage a pretty strong reversal here today," said Brian Belski, chief investment strategist at Oppenheimer. The Dow and S&P 500 are both up slightly more than 7 percent for the month, in a rally that has so far defied skeptics and has many strategists predicting it will soon end.
"It seems to me that people now, after this big move off the lows are questioning it even more," Belski said. "Now everything's hinging on second quarter GDP. Last time I checked, it's almost August. We're focused on April, May, June!"
GDP and the employment cost index are released at 8:30 a.m., along with revisions in GDP going back to the beginning of 2007. Those revisions could show that the recession was even deeper than previously reported. Chicago Purchasing Managers data is released at 9:45 a.m., and consumer sentiment is released at 9:55 a.m.
Chevron, Merck and Weyerhauser are among companies reporting earnings ahead of Friday's opening bell.
Traders expect the stock market to react negatively if GDP misses the mark, and particularly poorly if it is less than 2 percent.
"Are people going to freak out tomorrow if we get a weaker-than-expected GDP? Who knows? If they are, they are giving up a great opportunity," said Belski. "Earnings are coming in 75 to 80 percent above expectations. Corporate America continues to demonstrate a structural change in how they are managing their businesses, and people need to get on the train." Belski is on the bullish side of Wall Street's strategists, and expects the S&P to hit 1300 this year.
"We sense from conversations with our clients that people are still defensively postured with respect to what they think about U.S. equities. That doesn't mean they are buying defensive sectors. They are trading in a defensive manor. They are very reactionary," said Belski, adding clients are very focused on the daily flow of data. "I still think there's an opportunity. We still think the S and P is trading to a discount to where it should be."
What Was Watched
Earnings beats continued to outpace misses Thursday, but there were some troubling reports that got traders' attention. One was Colgate-Palmolive, which cut its 2010 forecast because of Venezuelan currency devaluation. It also reported lower sales and volume growth than analysts expected. Another disappointment was Kellogg, which reported alower-than-expected profit and cut its full-year forecast. Kellogg blamed a cereal recall and weak cereal sales and pricing. Not a surprise that the consumer staples sector was the second worst performing S and P sector, down 1.1 percent.
There were some weak outlooks from technology companies in the past couple of days.Nvidia andSymantec late Wednesday both cut expectations for the next quarter. Those stocks traded lower Thursday. After Thursday's bell, biotech Amgen was another disappointment, warning that because of the weak euro, it sees 2010 revenues below previous estimates.
Traders were also focused on Fed speak Thursday, with the most buzz centered on comments from St. Louis Fed President James Bullard, who warned that the U.S. could see Japanese-style deflation. He also said the Fed should consider buying more Treasurys if inflation should drift lower, rather than promising an extended period of low rates. Bullard appears Friday on "Squawk Box."
Bullard's comment hit a nerve with investors, providing fuel to one side of the ongoing debate about whether the economy needs more stimulus, or less stimulus at this point on its road to recovery.
Dallas Fed President Richard Fisher may have had some of the more colorful comments of the day. He said the recovery is a "slow slog" out of a "most hellish downturn," but he said more accommodation would not help the economy.
However, the Treasury market Thursday continued to keep its focus on the "extended period." Investors drove yields lower along the curve as they bought heavily in select durations while shunning the 30-year bond. The spreads on the 5-year to 30-year, and the 7-year to 30-year are now at record levels, and the spread between 10s and the 30-year are at multi-year highs, according to John Spinello, Treasury strategist at Jefferies.
The Treasury also auctioned $29 billion in 7-year notes Thursday. "The auction was sloppily bid, given the hype for the intermediate part of the curve. I suspect that the indirect bid was an indication of the yield levels being the lowest in 7-year notes since they were reinstated," he said.
Aon, Borg-Warner, McKesson,Public Service, Simon Properties, Fortune Brandsand Calpine also report earnings Friday.
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