Market may cool as pace quickens

Wall St Week Ahead: Market may cool as pace quickens
Reuters, 08.31.03, 10:09 AM ET

By Rachel Cohen

NEW YORK, Aug 31 (Reuters) - Wall Street kicks back into high gear this week after slogging through the end-of-August lull, but the market may turn flat to slightly lower after heating up all summer long.

Even as trade slowed to some of its lowest levels of the year last week, stocks added to the gains they have made since mid-March, when they began their sprint higher as investors started to bet the U.S. economy was gaining strength.

"I think the market has done much better this summer than people had anticipated," said Milton Ezrati, senior economic strategist at Lord Abbett & Co. "We had a dramatic run up in the spring. Summer tends to be a weak period, and there was a belief that the market was begging for a technical correction -- and it didn't happen."

The Standard & Poor's 500 index <.SPX> rose about 8 percent since Memorial Day, with the blue-chip Dow Jones Industrial Average <.DJI> rising about 9 percent. Traditionally, if not officially, Memorial Day is considered the beginning of summer and Labor Day the end.

With 75 summers of the S&P in the books, the average gain has been 3.97 percent, according to Gibbons Burke, editor of MarketHistory.com. For the Dow's 103 summers, the average gain has been 3.2 percent. Last summer the S&P lost 15.5 percent while the blue chips sunk 14.3 percent, he said.

Stocks rose in light trade on Friday to cap the third straight week of gains for the S&P 500 and Nasdaq, boosted by a report showing surprisingly strong growth in manufacturing in the Midwest.

The blue-chip Dow posted its fourth up week in a row. Both the Dow and S&P 500 locked in a sixth straight month of gains in August, and the Nasdaq a seventh.

On Friday, the Dow Jones industrial average <.DJI> rose 41.61 points, or 0.44 percent, to 9,415.82, according to the latest data. The broader Standard & Poor's 500 Index <.SPX> gained 5.17 points, or 0.52 percent, to 1,008.01. The technology-laced Nasdaq Composite Index <.IXIC> added 10.27 points, or 0.57 percent, to 1,810.45.

VOLUME BACK TO NORMAL

This week, volume should get back to normal, traders said, but they expect the market to stay flat or possibly fall slightly if any of the key economic data coming out fail to meet expectations.

"I think we're just in a scenario where you seem to have still a lot of skepticism on the strong economic data," said Rich Nash, chief market strategist at Victory Capital Management. "September is a seasonally difficult period for the stock market so we think the market is probably going to continue to trade in a sideways pattern for some time.

"Eventually, whether it's in a month or two months, we do think the breakout is going to be on the upside as the economic data is going to be harder and harder to ignore the more time goes on."

After a long holiday weekend, investors will have to sift through a slew of reports this week to get a bead on the state of the U.S. economy. Markets will be closed on Monday for Labor Day.

On Tuesday, the Institute of Supply Management (ISM) will report on the level of manufacturing activity in August.

On Wednesday, the U.S. Federal Reserve will put out its "beige book," a report on the economic conditions. Also on Wednesday, the Commerce Department will issue its report on construction spending for July.

Thursday's reports include the Labor Department's revised data on productivity for the second quarter and its weekly reading of jobless claims. The ISM non-manufacturing data on activity in the service sector will also come out on Thursday.

The Labor Department also posts its nonfarm payrolls report for August on Friday, which provides figures on unemployment and wages.

Earnings reporting will be light next week, with ketchup maker H.J. Heinz Co. (nyse: HNZ - news - people) expected to post its quarterly results on Wednesday. Local telephone company Qwest Communications International Inc. (nyse: HNZ - news - people) is also set to release results on Wednesday.

Some analysts think the market could add to its gains in September as economic data bolsters investors' confidence.

"I think coming back after Labor Day, the pressure on the equity markets is expected to be on the upside," said Subodh Kumar, chief investment strategist at CIBC World Markets. "There's been a fair bit of data that suggests the economy is in relatively good shape."

(Wall St Week Ahead runs weekly. Comments or questions on this column can be e-mailed to rachel.cohen(at)Reuters.com.)