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The Coming Week: Markets Take a Breather

Street.com
By Rebecca Byrne
August 2, 2003

With most of the important economic data out of the way and only one significant earnings report due out next week, analysts say stocks could be in for some sleepy summer trading.

But they also caution that the market is heading into a seasonally frustrating period. According to the Stock Traders Almanac, August has been the worst month for the Dow Industrials and the S&P 500 over the past 15 years and the third-worst month for the Nasdaq.

"I think the market will probably stall over the next two to three weeks," said John Waterman, portfolio manager at Rittenhouse Financial. "For some reason, we as portfolio managers are less inclined to make big changes during the summertime, so my guess is we'll stay in a trading range until September."

Larry Wachtel, chief market analyst at Prudential Securities, agrees, saying all the "blockbuster" news has already been released. Last week saw the release of the employment report for July, a key reading on manufacturing, data on consumer confidence and the advance gross domestic product report, among other things.

"We're entering into a period where the catalysts from economic news are gone, and the earnings are fading out," he said.

Rate Impact:
While analysts say there isn't much news to move the market significantly in either direction next week, another sharp move up in interest rates could have some impact.

Bonds fell sharply this week, sending the yield on the 10-year up to 4.42%. Some analysts worry that higher bond yields will entice investors away from stocks and potentially stall the nascent economic recovery. Still, Waterman isn't concerned.

"There's always a tug of war," he said. "As the economy picks up, rates will too, but we feel pretty good that we're at a turning point and we will see a virtuous economic cycle where good economic data feeds on itself."

Wachtel said that if long-term rates shoot up to 5%, it would probably have a negative impact on stocks, but he doesn't expect that to happen, noting that the recent selloff has simply been a correction from a very overbought condition in mid-June.

Even though rates have risen dramatically, Richard Nash, chief market strategist at Victory Capital Management, said they are still low by historical standards. Indeed, the 10-year note is still below its average yield for 2002.

"From current levels, rates would have to increase roughly another 75 basis points and remain at those levels for an extended period before we would become concerned that interest rates would slow economic growth," Nash said.

Nash said he's cautious on stocks "in the near term," however, as the market needs more time to consolidate its gains, "but we do continue to overweight equities at the expense of fixed income and believe that active portfolio management should outperform indexing in this environment."

The Cisco Effect:

One potentially important event next week will be the release of Cisco Systems' earnings on Tuesday. Analysts are expecting the company to post a fiscal fourth-quarter profit of 15 cents a share compared with 14 cents last year.

"Cisco's stock has done so well recently that I doubt there's any upside there," Wachtel said. "It's probably a neutral for the market."

Cisco has climbed 46% this year. Other earnings of note include Gillette and Tommy Hilfiger on Tuesday and Calpine on Wednesday.

Meanwhile, investors will be paying close attention to a few economic reports due out next week. On Monday, the Commerce Department will release data on factory orders for June. Analysts expect them to rise 1.5%.

The Institute for Supply Management's services index for July is expected to fall to 58 from 60.6 in the prior month. A preliminary report on second-quarter productivity is on tap for Thursday, and analysts are calling for a 2.2% rise compared with 1.9% in the first quarter. Initial unemployment claims, wholesale inventories and consumer credit are all scheduled for Thursday.

The Dow Jones Industrial Average fell 1.4% last week, losing 130 points, to 9154 while the S&P 500 was off 1.9%, or 18 points, at 980. The Nasdaq was down 0.9%, or 15 points, to 1715.