The final days of summer could bring more disappointing manufacturing and employment data, setting the stage for a choppy September.
Even with a rally Friday, the Dow and S&P 500 were down about 0.7 percent in the past week, and are now down more than 3 percent for the month of August. Treasury yields continued to slide, with the 10-year touching a 19-month low yield of 2.418 mid-week, before rising to 2.652 percent Friday.
"History says you don't want to stick your head out there. If you're going to rent a boat and go sailing in the Caribbean, you don't do it in the hurricane season, and that's kind of what the equities market is like. We're entering hurricane season. Be careful," said Doug Cliggott, U.S. Equity Strategist at Credit Suisse.
Economic data in the past week painted a dismal picture of the housing market and showed weaker orders for finished goods. The data in the coming week includes the ISM manufacturing survey Wednesday and the August jobs report on Friday. There is also data that will give a good look at the consumer, including consumer confidence Tuesday, car sales Wednesday and monthly chain store sales Thursday.
"I think next week maybe ISM is more important this time around because business investment has been the bright spot in the economic recovery, and we're seeing signs of slippage. There's a risk we get an ISM new order print below 50 next week, given what we're seeing in the regional Fed surveys," said economist Jonathon Basile, also with Credit Suisse.
Tech bellwether Intel told a similar story about business spending Friday, when it warned its revenues would be lower than previously expected. Stocks Friday were higher even after the Intel news, and traders said the big chip maker, which closed higher, was beaten down ahead of the news. The market moved moved higher in a short covering rally after Fed Chairman Ben Bernanke signaled the Fed would do what it takes to keep the recovery from failing.
"Intel's preannouncement is indicative of the PC replacement cycle, which is an indication of business spending. It's not good news," said Barry Knapp, Barclay's Capital head of equities portfolio strategy. "What you're hearing from Intel, Cisco or durable goods is not business spending remaining strong."
Knapp expects to hear more technology companies preannounce after the Labor Day weekend. "I think there's a chance September could be pretty ugly, in which case I was thinking we could go down and retest the lows at 1010 (on the S&P 500). It may be we go below 1000," he said.
The S&P 500 finished the week at 1064, after rising 1.7 percent Friday. The Dow was up 1.7 percent at 10,150 and the Nasdaq was up a similar amount at 2153. Based on data going back to 1950, the Stock Traders Almanac says the month of September is historically the worst month for all three stock indices.
The average loss for the Dow in September is 1 percent and S&P 500, on average loses 0.7 percent. However, in four of the last five Septembers, stocks have gone higher (with the exception of the brutal September of 2008).
Cliggott also expects to see more earnings warnings. "The bad news is the global economy is slowing down. We think that's going to impact corporate profits, and we think profit growth is going to flatten out. The negative of that is we think consensus estimates are probably going to have to come down quite a bit. I think the rate of deceleration has taken everyone by surprise.
"This is a much more abrupt slowdown in activity than we were thinking, and I've got to think it's a more abrupt slowdown in growth than a lot of corporate managements were expecting," said Cliggott. "The third quarter is the first quarter since the fourth quarter of 2008 where we might see a significant number of earnings misses, and you should see lowering of near-term guidance."
Cliggott expects the S&P 500 to finish the year near its current level, between 1050 and 1125.
As stocks lost ground, bonds prices have been rising and yields, which move inversely, declined. Friday's big rally in stocks brought a reversal for Treasurys.
"The macro signal from much lower bond yields is a negative but various activities at the micro level could turn the macro negative into a sort of single stock positive if managements react in a smart way," (such as restructuring debt), Cliggott said.
Nomura Americas Treasury strategist George Goncalves believes Treasurys may be coming to the end of their run.
"It's a light week ahead of the Labor Day break...it's almost like the reverse of what happens in equities. In equities, you climb the wall of worry, and in bonds you kind of stumble down the wall of worry. The fact bonds were not able to rally on horrendous housing data and other pretty horrible data this week means we're having a hard time pushing lower in yields. We're definitely at the last stages of the bond market rally," he said.
"I turned neutral two weeks ago. I think the market is overbought, and it was a little too stretched. We've got to see how we do around ISM and (Friday's) payrolls. I love my bond market, but I think people have to put money to work in other markets," said Goncalves.
The jobs report is one of the two big numbers of the week. Basile expects August non farm payrolls to drop 125,000 when including the impact of the elimination of temporary government census workers. He expects the private sector to create just 10,000 new jobs. State and local governments are expected to trim 25,000 workers.
ISM is expected to come in at 53, but that is down from the 55.5 last month. A reading under 50 signals a shrinking economy.
Pimco senior market strategist Tony Crescenzi said the new orders component in the ISM report could come in below 50, but it's not necessarily a sign of an overall contraction. He said it would not signal that unless it falls to a level of 42.
Crescenzi said the Fed's minutes, scheduled for release Tuesday afternoon, may now be anticlimactic after Bernanke's speech. The Fed chairman's major speech, delivered at the Jackson Hole, Wyo. Fed conference helped calm the markets, despite the fact that it did not detail the course of further quantitative easing some bond traders were expecting.
"There seems to be contingency plans in the works, but the Fed right now feels it's not necessary to either discuss or detail or put them in place...and secondly and very importantly, the Fed's outlook on the economy hasn't changed materially," said Crescenzi.
He also does not expect the Fed to release a changed economic forecast with the minutes of the Aug. 10 meeting. "Apparently, the forecast of the August 10 meeting among members hadn't changed enough to warrant aggressive action. More of what is involved in the contingency planning will be revealed as we go, particularly if the data is weak...In the policy statement September 21, some of the contingency planning might be revealed," he said. September 21 is the next Fed meeting date.
Other data expected in the week ahead includes personal income and the Dallas Fed survey Monday. S&P/Case Shiller and Chicago PMI are released Tuesday, and construction spending is Wednesday, in addition to the ADP employment report. Weekly jobless claims are issued Thursday, as are productivity and costs; pending home sales and factory orders. The ISM non manufacturing data is released Friday morning, as is the August employment report.
There is also some Chinese data of note, including manufacturing PMI on Wednesday and non manufacturing PMI Friday. Traders are also expecting a Bank of Japan meeting early in the week as speculation swirls that Japanese officials may take action to reign in the rising yen.
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