Stocks are poised to open mixed to slightly lower early Friday with positive corporate news being offset by a weaker than expected economic numbers. One hour before the start of trading, index futures were pointing to modest losses for both the Dow Jones Industrial Average ($INDU) and the Nasdaq Composite Index ($COMPQ). Investors now await more key economic data due out later this morning. If the numbers also disappoint, the odds favor a more dramatic move to the downside in the stock market.
The latest unemployment numbers were a bit weaker than expected. The report, which is released by the Labor Department on the first Friday of each month, showed the nation’s unemployment rate dipping to 6.2% from 6.4% from the month before. That was a bit better than economist estimates, which were anticipting a drop to 6.3%. However, non-farm payrolls were worse than expected. After falling by 30,000 in June and 70,000 in May, non-farm payrolls dropped by another 44,000 jobs in July. The drop in July was a disappointment to some investors because it indicates that the manufacturing sector is still not adding new jobs.
Two more key pieces of economic data are scheduled for today. The University of Michigan Consumer Sentiment Index is released at 9:45 a.m. ET. Economists expect the index to increase to 90.5 from 90.3 two weeks ago. Tuesday, stocks tumbled following a weaker-than-expected reading from the Commerce Department’s survey of consumer confidence. The Institute of Supply Management Index [ISM] releases its manufacturing index at 10:00 a.m. ET. The index is expected to rise to 52 from 49.8 in June. Readings of 50.00 indicate expansion in the manufacturing sector.
In stocks news, shares of Altria (MO) are expected to trade higher after a Los Angeles jury cleared its Philip Morris USA unit of liability for a smoker’s inoperable lung cancer. The decision represents the first victory for the company in Lost Angeles. Disney (DIS) could also help boost the Dow after the media and entertainment company reported fiscal third-quarter profit of 19 cents a share, which beat Thomson First Call consensus forecasts by 3 cents a share. AT&T (T) might also help stabilize the Dow on news that WorldCom, which is attempting to emerge from bankruptcy, is suspended from bidding on new government contracts. However, Johnson & Johnson (JNJ) may weigh on the market after a Merrill Lynch analyst cut the rating on the company from “buy” to “neutral”. The analyst cited increased competition in the market for stents for the downgrade.
Today is the first day of trading for the month of August. In July, stocks rose modestly and the Dow Jones Industrial Average gained 250 points or 2.8% for the month. Technology stocks performed better and the Nasdaq Composite rose nearly 7%. Now, however, the stage is set for increasing market volatility, as the focus of attention appears to be shifting from the earnings reports to the economy.
Investors are also watching the happenings in the bond market with a certain amount of unease. Government bonds have been falling sharply and interest rates are on the rise. Even Friday morning, despite the weaker then expected employment numbers, the ten-year note was under pressure and its yield was rising above 4.5%. In mid-June, the yield on the ten-year was only 3.11%. There is speculation that some large bondholder may now be in financial distress and is consequently liquidating a large portfolio of bonds. That is one explanation for the recent bout of selling in the bond market. If the trend continues, and the sell-off in the bond market continues, it is surely going to start driving down share prices amid growing concerns about the negative impact of rising interest rates on housing, the consumer, the economy, and corporate earnings.
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site
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