Wall Street’s spectacular run has hit a speed bump, with investors pausing to digest gains and pondering how far the rally can go in an economy showing signs of recovery along with lingering weakness.
The main stock indexes pulled back from a four-week run that saw gains of around 15 percent for the broad market.
The Dow Jones Industrial Average of blue-chips fell 0.52 percent for the week to end at 9,321.40 after notching a fresh nine-month high earlier in the week.
The Standard & Poor’s 500 index shed 0.63 percent over the week to 1,004.09, while the tech-dominated NASDAQ retreated 0.74 percent to 1,985.52.
The broad market has rallied more than 45 percent from lows hit in early March amid expectations for recovery, but is still down around 35 percent from all-time highs in October 2007.
The most recent rally, however, has given way to consolidation, and doubts about the recovery have grown amid lackluster data on US retail sales and consumer confidence.
“The strong positive market momentum seen in mid-to-late July has dramatically slowed,” said Fred Dickson, chief market strategist at DA Davidson & Co.
“We are not looking for major catalysts to lift the market over the next two to three weeks. Historically late August and September is a difficult time for the stock market, especially during years where the market has made a substantial move as buyers traditionally wait for third-quarter guidance and earnings releases before making new major stock purchase commitments,” Dickson said.
Myles Zyblock, analyst at RBC Dominion Securities, said that the market was now being plagued by doubts after the strong runup.
“Absent a sustained economic recovery, equity market gains will prove difficult to keep and nearly impossible to build upon, in our view,” he said. “At some point down the road, we might indeed discover that the labor market failed to recover, that the economic upturn proved brief and that the equity market rally was merely a multimonth pop in a major downtrend.”
However, he said there were signs the economy was on the mend.
“Specifically, the leading economic indicators that have worked for decades remind us that the economic recovery is progressing,” he said. “In fact, some of these same indicators point to the possibility of a powerful surge in production activity starting as early as this quarter and extending out into the first half of 2010.”
Doug Sandler at Riverfront Investment Group said that despite the fear that rally has gone too far, it pays to look back to historical highs rather than the March lows, which he considers an anomaly.
“We should discount the extraordinary lows and excessively cheap valuations that were reached by the S&P 500 in March 2009,” Sandler said. “Ignoring the extreme valuations from March, we think that the market is currently neither cheap nor expensive.”
Linda Duessel at Federated Investors said she expected the economy to recover with help from the Federal Reserve’s commitment to easy money and other stimulative efforts.
At its meeting on Wednesday, she said, “The Fed made clear it’s in no rush to pull back.”
“This means money should remain cheap and growth could surprise to the upside in the second half,” she added. “So while commentators are suggesting a correction into the worst month of the year [September] — and this very well could happen — we would not want to lose sight of the continuing bullish story.”
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