Stocks: New Season, Same Worries

Your summer vacation is over. Here's what to expect for the market in the all-important fall months

by Ben Steverman

This week it will feel different on Wall Street, and it's not just the change of season.

Stocks have traded wildly all summer, pushed and pulled by the fluctuations in the oil market and news from the financial sector. As usual, with many investors and traders on vacation, trading volume has been light. Major indexes are trading more or less where they started the summer in late June.

After Labor Day, however, investors get serious and the summer market doldrums officially come to an end. Traders jump back into the market, and portfolio managers make their bets for the rest of the year. "Investor and trader interest is heightened," says Brian Gendreau, investment strategist at ING Investment Management. On Wall Street, "the pulse picks up and people start reexamining their investment theses."

BusinessWeek asked professional investors which trends could affect the stock market this fall. Here are five factors equity investors should watch in the coming weeks.

1. Oil Prices

As the price of oil hit record levels early in the summer, stocks took it on the chin. High energy costs hurt consumer spending and narrowed corporate profit margins. Since July, oil prices have backed off, and stocks have done a bit better. Oil is now trading almost 22% off its all-time high of $147.27 on July 11.

"The trend [for crude oil] seems to be down at this point," says John Wilson, chief technical strategist at Morgan Keegan. The threat of hurricanes and tropical storms may push oil prices higher, but Wilson believes any rally will be temporary.

Hurricane season, however, officially lasts until the end of November. Stock investors are well aware that a major storm could disrupt oil supplies and once again send oil prices, and prices at the gas pump, soaring. "We're holding our breath," says Richard Sparks of Schaeffer's Investment Research.

2. Credit Markets

Both January and September are crucial times of the year for debt markets, says Brian Reynolds, chief market strategist at WJB Capital Group. Coming after vacations in December and August, respectively, both months are times when a large number of new corporate bonds are issued.

Disrupted by the financial crisis, corporate issuances in January of this year were a "disaster," Reynolds says, noting that it was a preview to several difficult months in the stock market at the beginning of 2008.

Eight months later, will investors in the credit markets be willing to buy new bonds? "We could have a bounce in stocks [this fall], but unless people are buying corporate bonds any bounce will be just that—a bounce—that will be temporary, Reynolds says.

Credit market participants have been even more pessimistic than equity investors this summer. Now that summer is over, investors may decide bonds are at bargain levels, or they may decide the environment is still too risky to be big buyers of bonds.

3. Financial Sector and Housing

Troubled mortgage financiers Fannie Mae (FNM) and Freddie Mac (FRE) grabbed headlines all summer, and investors continue to worry about the threat of more bank failures. Expect this focus on the financial sector to continue in the fall.