Wall Street’s rally has hit a speed bump as fresh doubts emerge about the notion of a quick recovery for the US economy from its malaise.
Market momentum has taken a hit from skyrocketing crude oil prices and fears that the US and perhaps the global economy could face more turmoil from housing and credit woes.
The Dow Jones Industrial Average slumped 2.4 percent in the week to Friday to 12,745.88 and the Standard & Poor’s 500 broad-market index lost 1.8 percent to 1,388.28.
The tech-heavy NASDAQ composite shed 1.3 percent for the week to 2,445.52.
The pullback after three weeks of gains was not seen as unusual. But some analysts are questioning the notion of a speedy recovery for the ailing US economy, and whether its weakness will spread globally.
Robert Brusca at FAO Economics said a report on the US trade deficit was troublesome. The gap fell to US$58.2 billion in March as a result of declining imports, rather than rising exports.
“The US has been trimming its deficit ... That means less stimulus for the rest of the world,” Brusca said. “A picture of a slowing world economy can be seen in the snapshot of US trade this month. It’s for real. It’s contagious. It’s a slowdown.”
Morgan Stanley economists Richard Berner and David Greenlaw said in a research note that the rally in the stock market reflected “the belief that the worst is over for the economy,” but that this may be too rosy a scenario.
“In our view, the recent run of better data does not signal that recession risks are receding,” they wrote. “If anything, there is a renewed disconnect between market pricing and our view of the economy: We think the economic fallout and resulting downturn is only beginning.”
Fears of more economic turmoil were heightened by the spike in crude oil futures, which hit fresh records for most of the week and ended above US$125 a barrel. Some analysts said forecasts of a “super spike” to US$150 or US$200 a barrel have become more credible.
“A super-super [oil] spike would most likely put a stake in the heart of global economic growth,” Ed Yardeni at Yardeni Research said.
Wall Street will get a snapshot of consumer health in the coming week with a report on last month’s retail sales. Since consumer spending represents some two-thirds of economic activity, this may provide information on whether the US consumer is holding up in the face of an economic storm.
Joseph LaVorgna, chief US economist at Deutsche Bank, said he believes consumers are hurting.
“Household buying power this year will be severely crimped by decelerating cash flow, tighter lending standards and less homeowners’ equity,” he said. “This should keep a lid on consumer spending and by default the economy.”
LaVorgna said the US government’s tax rebates from a US$168 billion economic stimulus plan “will help consumer spending, but we believe they will provide only a temporary fillip to activity.”
Key data in the coming week include the report on US retail sales on Tuesday, consumer inflation data on Wednesday and numbers on housing starts on Friday.
Bonds rose in the past week, benefiting from worries about stocks. The yield on the 10-year Treasury bond fell to 3.767 percent from 3.845 percent a week earlier and that on the 30-year bond eased to 4.524 percent against 4.565 percent. Bond yields and prices move in opposite directions.