Market Insider

Wednesday Look Ahead: Why the Services Data is Unlikely to Boost Stocks

Stocks traded sluggishly in a case of the post-holiday doldrums Tuesday, a market mood that could prevail Wednesday if a report on the services sector is as expected.

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The Institute for Supply Management's non-manufacturing suvey is the data to watch Wednesday, when it is released at 10 a.m. The Challenger layoffs report is out at 7:30 a.m., but ADP's private sector payrolls report, usually released Wednesdays, has been postponed until Thursday because of the July fourth holiday.

"The market will surely put more emphasis on the number (ISM) than it deserves," said Deutsche Bank chief U.S. economist Joseph LaVorgna.

"I think it will be a little bit softer, only because I think the quarter as a whole and June, in particular, wasn't that great. I think it will be down a little bit but hopefully not enough to get people too scared. I think that any weak data in June, people will still chalk up to Japan and residual slowdown from high energy and high commodity costs," he said.

LaVorgana expects the ISM survey, which shows activity in the service sector, to be 53.5, slightly less than consensus of 54 and below last month's 54.6. The ISM manufacturing survey Friday helped fuel a stock rally when it came in better than expected, though economists said some of the report's internals were weak.

The Dow Tuesday fell 12 to 12,569 and the S&P 500 slipped 1 to 1337, subdued moves after last week's powerful rally.

The excitement, however, was in other markets. Oil, for instance, gained $1.95 per barrel, or 2 percent to $96.89. The euro, which usually moves higher in tandem with oil, fell 0.7 percent against the dollar.

LaVorgna said a renewed rise in oil would be a headwind for the economy, but he's not worried yet as gasoline prices are still in decline. Regular gasoline was at $3.56 per gallon nationally, down from May's high of $3.98, according to AAA.

Earnings Battleground

Markets are heavily focused on Friday's June jobs report, but the stock market discussion is increasingly about earnings. Alcoa kicks off earnings season with its report next Monday.

"I actually think when second quarter earnings season starts next week, it could be a catalyst to move the market higher," said Jack Ablin, CIO of Harris Private Bank. Ablin concedes analysts' estimates may be too high, but he believes the S&P 500 could finish the year at 1410/1420.

Morgan Stanley's Adam Parker, takes the bear side of the discussion. "Some people think the valuation is very compelling, and they're trying to make the 'market is cheap' call. The market is not quite as cheap," he said. The market multiple has contracted to 12.7 times from 13.5 times in the first half of the year.

Some of the reasons Parket disagrees is that the dividend yield - at 1.7 percent - is much lower than the long term average of 2.7 percent. He said the market is also near 10-year lows on price to forward earnings, which in the 43 percentile, just slightly cheaper than its average.

The market's forward p/e, or price to future earnings is 12.7 percent, compared to its average 13.6 percent. But Parker says that is misleading. "The mega caps are at a 24-year low. If you look at the valuation of the top 30, its' going to skew down," he said.

"At the end of June, it was 11.5 for mega caps and the rest of the market was 13.5 times," he said. "...Our view is the mega caps are undervalued." The mega caps are the largest 30 companies in the S&P 500.

Parker believes the market will end the year lower, at 1238 on the S&P. "My view is the multiple is going to contract for some time, in the second half of the year and next year. Our view is the market is going to end up lower. When you think about where you're heading six to 12 months out, it's going to be lower," he said.

Social Media

Social media is a big theme Wednesday. First, Allen and Co's annual Sun Valley conference convenes and the media industry's titans will hold their own social of sorts. At the same time, Facebook is making a 1 p.m. ET announcement, which is speculated to include  a possible video chat service with Skype, which is in a merger with Microsoft.

President Obama plans to host a Twitter town hall at 2 p.m. The federal deficit and debt ceiling discussions will be of interest. President Obama Tuesday said he is not interested in a short-term deal on the debt ceiling and wants to include cuts to defense and entitlements, as well as ending certain tax deductions for the wealthy.

Europe will stay a focus after Portugal's debt rating was downgraded to junk by Moody's, and European banks meet in Paris to discuss terms for rolling over Greek debt.

FDIC Chair Sheila Bair hosts her last FDIC meeting at 10 a.m. The discussion will center on new rules to institute new powers to liquidate big, failing firms.

IMF Director Christine Lagarde holds a press briefing at IMF headquarters in Washington at 9:30 a.m.

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