Shell-shocked stock investors will search this week for calm to return to markets after the worst three weeks for stocks in two-and-a-half years.
With the blow from the Aug. 5 US credit rating downgrade behind them, investors will focus on the outlook for the US economy, as well as signs that European policymakers may be able to contain the eurozone debt crisis.
Widespread investor panic put the market on a roller-coaster ride the past week, with steep losses followed by nearly as steep gains in high-volume trading. It was the busiest week for volume since October 2008.
Though investors are still searching for a bottom in the selloff that has taken the benchmark Standard & Poor’s index down 12.4 percent since July 22, indexes rose both on Thursday and Friday — the index’s first two-day rally since the middle of last month — and volatility eased.
The move could set stocks up for a calmer week, especially if economic data shows the US is not headed for another recession, strategists said.
“Every bit of data that shows the economy not slipping into recession is going to be the basis for the market to begin to calm down in the weeks ahead,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
While Wall Street stocks ended higher on Friday, the market fell for the week. The Dow Jones Industrial Average fell 1.5 percent to 11,269.02 and the NASDAQ lost 1 percent to 2,507.98. The S&P 500 fell on 11 of the past 15 days, dropping 12.4 percent in three weeks to close at 1,178.8.
Housing and manufacturing reports are among indicators on tap in the week ahead, including the New York and Philadelphia Federal Reserve regional manufacturing surveys and existing home sales.
Manufacturing has been among the strongest sectors of the economy, but a report earlier this month dented that picture. The Institute for Supply Management (ISM) manufacturing report, a gauge of factory activity, fell last month to its lowest in two years and was barely above the mark dividing growth and contraction.
It was quickly followed by an ISM report showing the pace of growth in the US services sector ticked down unexpectedly.
More recent data has suggested the economic recovery will stay on course.
US Department of Commerce data on Friday showed retail sales posted the biggest gains in four months last month, which was a catalyst for stocks to rise.
“We think the deterioration in the US macro outlook got us into this mess and will likely get us back out,” said Barry Knapp, head of US equity portfolio strategy at Barclays Capital in New York.
“If we’re right ... we will get the stock market to trade at least back into its old 1,250 to 1,350 range that prevailed from March through the recent downturn,” he said.
The S&P 500’s price-to-earnings ratio is at 10.46, according to Thomson Reuters data, considered cheap by historical standards.
That valuations are cheap suggests to some strategists that stocks remain attractive, especially when compared with US Treasuries, but others say earnings expectations are likely to deteriorate going forward.
Technically, the market remains weak.
“Most technicians would agree that the long-term market cycle has been damaged, given two-year uptrends have been broken, monthly momentum indicators have turned down and a lengthy list of stocks have collapsed through important long-term support levels on expanding volume,” analysts at RBC Capital Markets said in a note on Friday.