May 25, 2002
By Mark Gongloff, CNN/Money Staff Writer
NEW YORK (CNN/Money) - Lacking confidence of their own, U.S. stock markets will look to consumers this week for a reason to send stocks higher.
Consumer sentiment reports from the Conference Board and the University of Michigan, if positive, could ease the pain of last week, when the major indices gave up most of their gains from a mid-month rally.
With no significant corporate earnings reports on the calendar for the week, pre-announcements still another week or so away and lingering fears about future terrorist attacks, the data could be one of the few potential sources of good news all week.
"Sentiment numbers have always been key in determining consumer spending patterns," said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum. "Good numbers have in the past [led to] some rally in the market. Whether that happens this time or not, we'll see."
Consumer spending is easily the 800-pound gorilla of the U.S. economy, making up more than $6 trillion of the nearly $10 trillion gross domestic product (GDP) and carrying the economy through a recession, terror attacks, falling stocks and accounting scandals. The question now is whether or not it can hold on until businesses start spending again.
Federal Reserve Chairman Alan Greenspan and other economists say business spending is the key to the strength of the economy's recovery from a recession that began in March 2001. A slump in business spending -- especially in technology following a glut of spending in reaction to Y2K fears -- led to the broader recession and more than a million job cuts.
Corporate profits were also in a slump throughout the economic downturn, and S&P 500 profits have fallen for five straight quarters. Though after-tax profits for all U.S. corporations rose 0.9 percent in the first quarter, according to data in Friday's GDP report, and many analysts expect S&P 500 earnings to rise again by the second quarter, profits and final demand may not yet have recovered enough to justify increased spending.
"We have been counting on consumer spending for way too long a period of time, while our friends in corporations haven't done anything," said Ram Kolluri, chief investment strategist at GlobalValue Investors. "Even today, they can't report any significant top-line [revenue] growth."
"Here and there, the bottom line has improved because companies have cut down inventories, costs, etc.," he added. "Home Depot (HD: Research, Estimates) is an example. Even though they reported better-than-expected earnings, they don't see any demand."
And technology shares are suffering even more -- Sun Microsystems (SUNW: Research, Estimates), Applied Materials (AMAT: Research, Estimates) and Ciena (CIEN: Research, Estimates) were among the tech companies raising doubts last week about the strength of demand in the near future.
Such fears hurt the tech-heavy Nasdaq, and it ended down 79.90 for the week at 1,661.49, a drop of 4.6 percent. For the year, it's down nearly 15 percent.
Meanwhile the S&P 500 fell 22.77 to 1,083.82, a drop of 2.1 percent, and the Dow Jones industrial average ended the week down 248.82 at 10,104.26, a decline of 2.4 percent.
"We're right in the middle of a trading range on the Dow," said Hyman of Ehrenkrantz King Nussbaum. "It's really fighting, unable to break out on either side because the news is not that bad, but not that good. Without any guidance or new earnings of significance, [moves are] going to be stock by stock."
Terror and confidence
Much of last week's weakness had to do with fears about terror attacks, which is the x-factor in the economy and the market this week and beyond. If there are no attacks during the three-day Memorial Day weekend, then investors might breathe a sigh of relief -- at least until they start worrying about the 4th of July.
"It's almost like the market's waiting for something to happen, which is not a good thing," Hyman said.
Will these fears also weigh on consumer confidence? A first look could come on Tuesday, the first day of trading following the holiday weekend, when the Conference Board is scheduled to release its May survey of consumer confidence. The closely watched index dipped to 108.8 in April, and economists surveyed by Briefing.com expect it to rise to 110 this month.
On Friday, the University of Michigan is scheduled to give its paying subscribers a revised consumer sentiment survey for May. It first estimated that its sentiment index rose to 96 in May from 93 in April, according to published reports, and economists surveyed by Briefing.com expect that number to stay the same.
Other data next week could help clarify the outlook for business spending. Purchasing managers in Chicago report Wednesday on manufacturing activity in the area in May, a gauge for how manufacturing is faring in the rest of the country. Economists expect the Chicago PMI to fall to 54.5 from 54.7 in April, a level indicating growth in the sector.
On Friday, the Commerce Department reports orders for goods made in U.S. factories in April. Economists surveyed by Briefing.com expect factory orders to rise just 0.3 percent following a 0.8 percent gain in March.
If all else fails, at least history could be on the side of stocks -- markets have risen in 14 of the past 18 post-Memorial Day weeks, according to Briefing.com.
http://money.cnn.com/2002/05/24/markets/sun_lookahead/index.htm