Summer may bring a turning point for stock market

[May 17, 2008]  NEW YORK (AP) -- After nine months of turmoil that started with the collapse of the subprime mortgage market, Wall Street appears to be at a turning point of sorts.

The data of the past few weeks have given investors some hope that the worst of the credit crisis has passed, that the economy isn't losing jobs at a dangerous rate and that inflation isn't out of control. The result has been relative calm in the financial markets, enabling the major indexes to reach levels they hadn't seen since early in the year - including the Dow Jones industrials' brief return earlier this month to the 13,000 mark.

Analysts say data to be released in June and July will determine whether Wall Street extends its recovery or backtracks. If it moves higher, it will break an old habit of pulling back during the summer doldrums - and some analysts believe this may indeed come to pass.

"There's a bullish momentum that overrides the typical seasonal factors that would tell you to sell stocks in the summer," said David Kotok, chairman and chief investment officer of New Jersey-based Cumberland Advisors.

The market will also have its eye on the rising price of oil as it reviews each report. And if oil continues to press higher, it could temper the market's enthusiasm should the economic numbers are upbeat.

For now, the big bet is that economic reports and other key data will show the U.S. was in a mild recession, and that a recovery is already in play. If investors get the confirmation they are looking for, cash could stream into the stock market.

The next two weeks have important numbers including April wholesale inflation and existing home sales, as well as another reading on first-quarter gross domestic product. And two critical reports on consumer confidence and spending - which may show whether increasingly expensive gasoline is making households cut back on discretionary purchases.

When reports start coming out in early June, they should be able to show among other things whether the string of interest rate cuts since last summer have had the desired effect of getting a hobbled economy growing again. In the first week of June, the Institute for Supply Management issues its assessments of the manufacturing and service economies during May and the government releases its report on whether jobs were created or lost during the month.

"We're going to find out if the stock market is right, and that this will be one of the shallowest recessions on record," said Dan Seiver, a finance professor at San Diego State University. "Or, that the economy is going to be sicker longer, and when the market realizes that it will have a nasty down-leg."

In the second week of June, one of the key reports will be the Fed's own evaluation of the economy, its Beige Book survey of how the regions of the U.S. are faring in the current economic climate.

Nine of the 12 Fed districts surveyed in March said that economic growth slowed because of anemic real estate markets and a slowdown in consumer spending. It showed the economy was certainly troubled, but not plunging.

Of course, Wall Street always pays close attention to economic reports, and was doing so long before the credit crisis. But the data takes on greater significance when many investors have put their cash on the sidelines and are deciding to put it back into the market - or to leave it there and take even more money out of stocks if the numbers point to a continuing slump or if they're inconclusive.

Along with Wall Street, the Fed will be parsing the data. But the central bank itself will be one of the most crucial economic indicators when it meets again June 24-25 - Wall Street wants the Fed to provide a stronger sign that it feels April's quarter-point cut of the fed funds rate will be the last, and that the economy is back on track for growth.

And analysts like Kotok are betting that the Fed's efforts to energize the economy have worked - and that will give the market permission to charge ahead.

"Our view is the Fed will succeed because it has the power to do so, and it has now caught on to the fact that this is serious," he said. "The stock market is anticipating it, and confirmation of this might not be that far off."

[Associated Press; By JOE BEL BRUNO]

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