Wall Street ponders if rally has staying power

July 25, 2009
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, NEW YORK, Jul 25 – After a sizzling rally that has pushed Wall Street to its best levels of 2009, investors are pondering whether recovery has arrived or if this is another bear market disappointment.

The market has been energized by a better-than-expected corporate earnings season that has sparked renewed optimism that the brutal economic slump is near its end if not already over.

The focus in the coming week turns from corporate to macroeconomic with data on new home sales and manufactured durable goods orders as well as a preliminary estimate on the performance of the US economy in the second quarter.

In the week to Friday, the Dow Jones Industrial Average leapt 3.99 percent to 9,093.24, surging past 9,000 for the first time since January and hitting its highest level since last November.

The gains built on a 7.3 percent surge the prior week.

The broad-market Standard & Poor\’s 500 index extended its rally with a weekly gain of 4.13 percent to 979.26 while the tech-heavy Nasdaq powered higher by 4.2 percent to 1,965.96.

The rises capped a stunning two-week gain of over 11 percent for the broad market.

Analysts say the quarterly earnings reports and guidance from major firms has sparked new optimism on Wall Street, which has been battered since the recession began in December 2007.

Philip Orlando, chief equity strategist at Federated Investors, said he believes the recession is over, although that may not be confirmed by economists for some time.

The data on leading indicators "suggests that the economy likely bottomed sometime between April and June of this year," Orlando said.

He added that a huge positive for the market is that some 70 percent of companies reporting earnings for the past quarter have beaten the consensus forecast.

"The sequential improvement in the economy during the second quarter likely contributed to a modest 5.0 percent increase in revenues across the board," he said, with profits helped by cost cutting as well.

"Investors are beginning to price in both the end of the recession and a rebound in corporate profits," he added.

But some argue the market may have gone too far in anticipating a rebound.

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, said the market may have a hard time following through its 15 percent surge in the second quarter for the the S&P 500 as well as the latest two-week rally.

"For the market to build on such a rapid advance in the current quarter, history again suggests that we would need to see 5.5 percent real GDP growth, which we give near-zero odds of occurring," said Rosenberg.

"Hence our call for a sputtering stock market through year-end. Too much growth — and hope — is priced in at this point."

Gregory Drahuschak at Janney Montgomery Scott said the rally still has legs that could take the S&P index up to as high as 1,100.

"For now we remain positively biased toward intermediate-term market potential," he said.

"Whether or not it is fair to characterize the action of the market over the last few weeks as a game-changing event, it does appear that the market\’s focus now is on the potential for positive events, which is in stark contrast to sentiment earlier this year when everyone was fearful of what the next extremely negative event would be."

Bonds were hit by the shift in sentiment. The yield on the 10-year Treasury note rose to 3.670 perecnt from 3.651 percent a week earlier and that on the 30-year bond increased to 4.555 percent from 4.529 percent. Bond yields and prices move in opposite directions.

In the coming week, the market will look to Monday\’s report on new home sales and Tuesday\’s consumer confidence survey to get a sense of whether a recovery is on track.

Another key will be the first estimate Friday of gross domestic product (GDP) for the April-June quarter, which could provide clues on economic momentum.

Analysts expect the report to show a contraction of 1.5 percent annualized, which would be a major improvement after the 5.5 percent slide in the first quarter.

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