Wall Street is wilting in the summer heat, with investors increasingly uncertain about an economic and earnings recovery any time soon.
More caution is likely in the coming week with a wave of earnings reports expected that may offer hints on corporate expectations for recovery from recession.
In the week to Friday, the Dow Jones Industrial Average declined 1.62 percent to 8,146.52 and the broad-market Standard & Poor’s 500 index lost 1.93 percent to 879.13, marking four consecutive losing weeks for those indexes.
The technology-heavy NASDAQ dropped 2.25 percent over the week to 1,756.03.
Ahead of the opening, the US government said the US trade deficit narrowed sharply in May to its lowest level in nearly a decade, led by a plunge in imported oil.
The deficit fell nearly 10 percent in May to a seasonally adjusted US$26 billion, the lowest level since November 1999. The news appeared moderately positive for the US economy, but also reflected weak global trade flows.
Al Goldman, chief market strategist at Wells Fargo Advisors, said the market remains in a “correction-consolidation” phase within a trading range.
“The correction is doing what corrections do — increasing fear and frustration, decreasing glee and bullishness,” he said.
The economic outlook “has most folks confused,” Goldman said. “We believe the data suggests that the end of the recession is near — that’s the good news for investors. However, the data also appears to indicate, as we have been saying for a month, that a strong economy is not just around the corner.”
Similar views come from Stephen Auth, chief investment officer at Federated Investments.
“Our view is that an economic recovery has in fact begun, and that a second or third dip, depending on how you count the waves we’ve had since the recession began ... is unlikely but not impossible,” Auth said.
“This forecast suggests that the outlook for returns on financial assets will likely be muted, and specifically that stocks are unlikely to return to their old highs any time soon. This said, off current low levels, we do believe that the best returns investors can hope for over the next 12 to 18 months are likely to come from stocks, even if the pattern of getting there may be erratic,” he said.
Auth said the S&P 500 was likely to drift toward the 1,000 level, some 15 percent above current levels, and that “the downside is ‘protected’ by the promise of continued government economic stimulus.”
David Rosenberg, chief economist and strategist at Gluskin Sheff, warned that stock investors should not look for strong gains simply based on a forecast of an end to recession, arguing that a “sustainable expansion” is needed.
“If the lesson from the 2000-2002 cycle is any indication, calling for the recession to end is basically irrelevant,” Rosenberg said. “What matters is that the recession’s end gives way to a vigorous expansion.”
Bonds strengthened. The yield on the 10-year Treasury note fell to 3.413 percent from 3.495 percent a week earlier and that on the 30-year bond eased to 4.201 percent from 4.317 percent.