The stock market could face more tough going, as it cuts through a busy week of economic reports on inflation, manufacturing and the consumer.
Stocks were down for a sixth week, and the Dow and S&P 500 are now down about 7 percent since late April. The Dow lost 1.6 percent for the week to 11,951, below 12,000 for the first time since March 18. The S&P was off 2.2 percent to 1270 Friday.
"Sentiment is still falling. It still hasn't dropped into panic territory. We're still sitting on the sidelines even though we think there is 10 percent upside by year end, " said Citigroup chief U.S. equity strategist Tobias Levkovich. He said the market faces a number of hurdles, including overly optimistic earnings estimates for the second half; the end of the Fed's quantitative easing program June 30, and the contentious debate in Washington about the deficit and debt ceiling.
Tech and financial stocks were particularly hard hit in the past week. Tech was the worst performing S&P sector, losing 3.3 percent, and consumer discretionary shares and the financials were both down about 2.7 percent.
The Nasdaq and the Russell 2000 both turned negative for the year this past week. The Nasdaq is now down 0.3 percent for the year, and the Russell 2000 is off 0.5 percent. In the past week, the Nasdaq was off 3.3 percent at 2643. The Dow is now up 3.2 percent for the year, and the S&P is up just 1 percent.
Stocks hit turbulence in the past week as concerns about a global growth slowdown drove investors from riskier assets. Headlines highlighting disagreement between the European Central Bank and Germany over the Greek bailout also kept markets on edge.
The full calendar of economic data in the coming week should help paint a picture of what is happening in the second quarter. Economists have been downgrading the second quarter and now mostly see growth under 3 percent.
Producer and consumer inflation data are released Tuesday and Wednesday, respectively. Retail sales for May are reported Tuesday, and industrial production is Wednesday. "Everyone's thinking gloom and doom here. The glass is half empty," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.
"As far as the retail sales, it looks like we're going to see some slowdown in the consumer side," said Rupkey, noting that car sales in May were at annualized selling rate of 11.8 million from above 13 million.
Retail sales are expected to be down 0.6 percent, but up 0.1 percent when autos are not included. He is also watching industrial production, which was soft in April and could be again because of the slowdown in manufacturing.
Oppenheimer Asset Management chief investment strategist Brian Belski said the stock market's focus is going to most particularly on weekly jobless claims on Thursday, which some analysts say must show signs of improvement before stocks can recover. "I think it's going to be a longer and more drawn out correction. Next week we've got some numbers coming out. We're all going to be waiting for Thursday," he said.
The claims number has been elevated above 400,000 since April, and is expected to fall slightly to 420,000. "...the question is what's happening with unemployment claims. As long as they stick above 400,000, there are some downside risks to the forecast out there," Rupkey said.
Economists mostly expect to see growth reaccelerate in the second half, and they blame supply chain disruptions from the Japanese earth quake for some of the sluggishness. High oil prices have also been a factor. On Friday, NYMEX crude fell sharply after Saudi Arabia said it would add more supply, following a fractious OPEC meeting which failed to result in anticipated production increases earlier in the week.
NYMEX crude fell $0.93 to $99.29 for the week. Brent crude for July delivery gained $2.94 per barrel this week, or 2.54 percent to $118.78.
Brian Dolan of Forex.com said Chinese PPI and CPI inflation data, industrial production and retail sales reports on Tuesday could also be a factor for global markets. "There's increasing concern that the bubble in China might burst, and I think overall you have a bit of an exodus from emerging markets back into safety," he said.
The worry in global markets has helped the dollar, which gained nearly 2 percent against the euro this past week. The euro was at 1.4348. The dollar was flat against the yen.
A number of strategists believe the S&P 500 will dip down to 1250 before it can start to move higher. But Belski expects the decline could be even greater. "I happen to think we're going to see a double-digit correction," said Belski.
"Most of my institutional clients are not positioned for the correction that's happening. Yes, we've seen an increase in defensive sectors, but that's because people have been so dramatically underweight those sectors," he said. He said the fact that investors weren't positioned for the decline weighs on the market and forces more selling as they reposition.
Levkovich said investors were too complacent and were heavily committed to equities back in April. "Here was this kind of complacent attitude with a bunch of issues still in front of investors," he said. The long list of issues includes corporate margin pressures; North Africa and Middle East uprisings; the Japanese earthquake and tsunami and bad weather in the U.S. Then, there were also the lingering sovereign debt problems in Europe.
Levkovich said one of his big concerns for the markets is the lack of consensus in Washington on how to tackle the U.S. deficit. Congress over the next two months will be wrangling over what to do about the debt ceiling and deficits.
"We have a real issue in Washington that just doesn't seem to be moving in a positive direction, and undermining the confidence in the country isn't particularly good news. When do cooler heads prevail and ideology and personal animosity get put aside?" he said.
QE2 Sets Sail
The end of quantitative easing (QE2) has become a constant topic of discussion as investors attempt to gauge what it's absence could mean to markets. Under the program, which began late last year, the Fed is purchasing a total $600 billion in Treasury securities through June 30.
"It's a psychological issue that can weigh on investor sentiment. There is a component of the investor population that believes all of the market's gains have to do with QE2 . We don't ascribe to that view but those who do, are going to have to adjust to a lack of QE2. I think the bigger issues is people were very complacent going into this," he said.
Levkovich says there is still not enough angst among investors to declare the sell off near an end. "The premiums paid on puts versus calls haven't spiked, which would indicate people are more willing to pay more for protection. I think we need to see more evidence of investor panic," he said.
Traders were watching the credit markets in the past week, particularly when the Fed refused bids on half the $3.8 billion securities for sale in its auction of mortgage assets. Bonds backed by subprime mortgages were among the first to shows signs of wear since markets came under pressure in late April. Yields on subprime mortgages and other risky bonds have risen close to 8 percent from 6.5 percent in March.
"There's just not buying interest at this point," said Zane Brown, fixed income strategist at Lord Abbett. "This is the absolute worst time to offer this. If it was a month ago, they probably would have had more bids than needed."
Brown said the fears about a double dip aren't helping. High-yielding corporate bond prices also have a taken a slide. "High yield is more credit sensitive and economically sensitive than it is interest rate sensitive. So it's not surprising to see Treasurys move up in price and down in yield in the event of economic slowdown, and high yield reflects that slow economy and actually widens in yield and goes down in price," he said. He pointed to the Barclays High yield index, which had was at a spread of 450 basis points to comparable Treasurys in May, but was now closer to 520 basis points. "A 70 basis points widening is huge," he said.
The week's data include:
Tuesday: NFIB (small business) survey, retail sales, PPI, and business inventories
Wednesday: CPI, Empire State survey, TIC data, industrial production, NAHB survey
Thursday: Initial claims, housing starts, current account (q1), Philadelphia Fed survey
Friday: consumer sentiment, leading indicators
Fed Chairman Ben Bernanke speaks on fiscal sustainability Tuesday at the Committee for a Responsible Federal Budget Annual Conference.
Richmond Fed President Jeffery Lacker speaks Monday on manufacturing in the south, and Dallas Fed President Richard Fisher gives an economic update Monday. Fisher also speaks Thursday on education.
Treasury Secretary Tim Geithner testifies House Financial Services Committee on Wednesday
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