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Saturday, 14 June 2008

The worst may be behind for Wall Street - or not

By Eileen Aj Connelly, AP Business Writer
Wall Street puzzles over whether market has hit bottom and what catalyst might trigger rebound

NEW YORK (AP) -- Not long ago, it seemed like the worst was over. As the first quarter wound down, the credit crisis appeared to be easing, the housing market seemed like it might get some footing and Wall Street was growing confident that it had finally found a bottom after months of volatility.

No one expected oil would shoot up 30 percent in just three months.

With new record crude prices almost daily and more negative news for the financial sector combining to generate a new round of volatility, Wall Street is left in disagreement over whether there will be any kind of market recovery soon.

"Frankly, my concern is that some folks may be wanting it too badly," said Gregory Miller, chief economist at SunTrust Banks. "There is a bottom out there, we are going to get through this, but I'm in the camp that thinks this is very long process."

Although the major indexes have gone through some wild swings in recent weeks, they have hovered above the low points seen in mid-March. Sam Stovall, chief investment strategist for Standard & Poor's Equity Research, thinks the market will stay there for a while. "Until we get more positive catalysts, we will likely meander within the mid-March through mid-May range," he said, referring to a swing of between 8 percent and 9 percent for the Dow Jones industrial average during those months.

"Because sentiment was so bad at the March bottom, that was one of the reasons our technician thought that the worst was likely over," Stovall said. "It did improve from then."

But while the sentiment on Wall Street gained some momentum, consumer sentiment went in the opposite direction as gas prices climbed.

"Consumer confidence ... has gotten dramatically worse," Stovall said. And with gas prices remaining at record levels, he doesn't expect that measure to improve any time soon.

But Stovall notes that investors tend to be more flexible that pinched consumers. "The confidence of Wall Street, I believe, fluctuates more rapidly than the confidence of Main Street," he said. "You can't really compare one to another."

Barring some new shock, Stovall thinks the market has likely touched, or at least come close, to its bottom. "If we haven't gone any lower as a result of all these worries," he said, "it would have to be some new worries that have yet to be anticipated."

Wall Street is about to get a host of new information that will help it decide what direction to head in. Investment banks start reporting second-quarter results Monday. May producer price and industrial production data, along with new housing figures will come in starting Tuesday, and the Federal Reserve's next decision on interest rates comes the following week.

If that combines to even a modest positive, Stovall said, investors might start to take some chances that could boost the market.

"Investors, in my opinion, are like hyperactive first graders playing musical chairs," he said. "They're always trying to out-anticipate everybody else."

That means they won't wait until they're 100 percent sure that the economy is on solid footing again before jumping back into the market, he said, for fear they would miss out on opportunities.

Adolfo Laurenti, senior economist at Mesirow Financial, is among those who think second-quarter results will help. "The current quarter will begin to come in and it won't look too bad," he said. While the oil spike has somewhat derailed the intended impact of the government stimulus checks, Laurenti said, he thinks positive earnings will help boost investor confidence.

"That should create some sentiment on the upside, especially for the blue chips," he said.

Laurenti thinks the third quarter might look a little weak because of the fading impact of the stimulus checks, and politics may produce some added uncertainty in the fall and going into the new year as a new president takes office.

And it will take some time for the financial industry to right itself. Miller said if large financial firms find they need to raise more capital, that could be a new shock.

But in the end, it all comes back to oil.

"I think the balance between supply and demand is real, and if the supplies are not keeping up with demand, that's basic Economics 101, prices go up," Laurenti said. "And that's exactly what we're seeing."

Miller, however, said people are already changing their behavior because of high prices, which will likely loosen demand and help reduce oil prices.

"Once this domestic economy changes its spending patterns and it appears to be permanent, then fundamentals for petroleum based fuels don't support oil at $125 a barrel," Miller said. "Will they come back down to $30 a barrel for oil? I doubt it. But is there something magic about $125? No. Could we easily come down below $100? We could."

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