BT: After tumble, US analysts see more room for bounce (12 Mar 2007)

After tumble, US analysts see more room for bounce

Strong jobs report reduces chances of US recession but dampens rate cut hopes

By ANDREW MARKS
IN NEW YORK

STOCKS recovered some ground last week from the previous week's brutal selloff, but the coming week presents a huge test for US equities, as investors' fragile sense of relief will only last as long as the next down day, selling in overseas markets, or disappointing economic report.

'We're still a long way from being out of the woods as far as the length and depth of this correction goes. And while I don't think there is any assurance that we will turn back onto solidly bullish footing for several weeks, another week of gains would go a long way to settling investor nerves that are still frazzled from the plunge we experienced,' said Hugh Johnson, chief investment strategist at Johnson Illington Advisors.

Frazzled indeed. Wall Street has been rudely shaken out of seven months of complacency by sell-offs in Asia and Europe, liquidity worries revolving around the prospect of the collapse of sub-prime lenders in the US and the unwinding of the so-called carry trade in the Japanese yen, and finally, new concerns that the US economy will stall into a recession by the end of the year, a possibility trumpeted by none other than former Federal Reserve chief Alan Greenspan.

'We were overdue,' said Al Goldman, chief investment strategist at AG Edwards. 'And when so much time passes without letting off steam, it's like a safety valve that's not working: so much pressure builds and when it goes, it goes big,' he said. Not only have stocks been on a non-stop ride upwards since last summer, but at nearly 4 1/2 years old, this is the fifth oldest bull market since 1900.

But now investors will have to spend the next few weeks asking whether the tumble was a temporary hiccup or the start of a new bear market. The recovery in overseas markets did a lot for investor sentiment, as did a key economic report on Friday reminding Wall Street that Goldilocks has not deserted the US economy just yet. The February jobs report outdistanced analyst expectations, disappointing some investors who are hoping for a rate cut, but leaving Wall Street comforted by another sign that the economy is holding up.

Suddenly, the chances of recession seem far more remote than the one out of three odds that Alan Greenspan offered the previous week. 'The strong jobs report we got (on Friday) supports the data from the Fed's beige book report on Wednesday that the economy is still on solid footing,' said Robert Brusca, chief economist at FAO Economics.

But lest the bulls start snorting too soon, there was enough troubling news for Wall Street to remain in a state of high anxiety over the fate of the market. Federal Reserve governor Susan Bies said on Friday afternoon that regulators are concerned about 'payment shock' from rising mortgage payments on adjustable rate loans. She also said the subprime market 'is not at the end of a wave, but at the beginning'. In other words, there could be more pain coming.

But while Ms Bies' words dampened traders' spirits after a strong start on Friday morning, the Dow Jones Industrials and the large cap S&P 500 both managed to eke out a small gain on the last day of trading for the week.

The Dow Jones Industrial Average recaptured 1.3 per cent on the week to close at 12,276.32. The Dow is still 4 per cent off its Feb 20 all-time high of 12,786.64 but is up 1.9 per cent from its recent low of 12,050.41 on March 5. The S&P 500 finished up 1.1 per cent for the week to close at 1,402.85. The large-cap benchmark is down 3.9 per cent from its high of the year but up 2.1 per cent from its Monday low. The Nasdaq Composite ended the week up 0.8 per cent. The tech-heavy index is still down 5.4 per cent from its Feb 22 high of 2,524.94 but is up 2 per cent from its Monday low.

The week ahead will be spent testing that recovery, and a wide array of US economic reports will be front and centre in traders' sights. 'If we're going to keep this recovery going, we're going to need to see these reports meeting or bettering expectations, and confirming that a recession is off the table while inflation is not a big threat,' said Mr Goldman. The week's reports include the February retail sales report tomorrow, Thursday's producer price index release, and the New York State Empire Index and Philadelphia Fed Index regional manufacturing reports.

The highlight for Wall Street, however, will be Friday's consumer price index report. With core CPI inflation up 2.7 per cent on a year-over-year basis as of January, still above the Federal Reserve's target level, and the Fed's next rate policy meeting on March 20, investors are hoping for signs that inflation is under control.

'We've got a tough road to hoe on the economy with the pain in the housing market still having a long way to go, so investors want to look forward to an interest rate cut in coming months,' said Mr Brusca. 'But if inflation doesn't show signs of slowing, you can throw out the prospect of a rate cut this summer,' he said.

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