Stocks: Are Summer Doldrums Here to Stay?

For investors used to the wild rides, the last month has been calmer. It could stay quiet if economic data stays muted and earnings don't impress

By Ben Steverman

Stocks started the year by shocking investors with big losses, then pleased them with a strong springtime rally. But in the last month, the once-thrilling stock market has been downright boring. On June 26, the broad Standard & Poor's 500-stock index clocked in at 918.90, just 0.24 points below the level at the end of May. "We're definitely in a trading range," says Dave Rovelli, managing director of equity trading at Canaccord Adams. "The market hasn't moved."

Not that there hasn't been some excitement for traders over the past several days. The S&P 500 dropped 3% on June 22, to its lowest level in a month, amid concern that the data so far are showing only minor improvements in the economy, says John Wilson, chief technical strategist at Morgan Keegan. But the scare didn't last: Buyers returned, and three days later the market had bounced 3% higher again.

Another Leg Up?

The market's rebound demonstrated, in the terminology of technical analysts like Wilson, "good support." When the S&P 500 dropped below 900, bargain-hunting investors immediately rushed into the market, showing there is still plenty of appetite for stocks at the right price.

In fact, this test of the market's technical support could be a catalyst for further gains in the next several days, Rovelli believes. "There's so much money on the sidelines, and there's not a lot of selling," Rovelli says, predicting "another leg up in the market."

Traders and technical factors could push stocks higher temporarily, but other market experts say stocks will need a fundamental driver to move higher. "We're basically going to be in a holding pattern until we get through economic data and earnings season," says Peter Cardillo, chief market economist at Avalon Partners.

Crucial New Data

The economic data will be crucial, with much of the focus on new data on the housing market and especially on the July 2 employment report. Economists expect the U.S. unemployment rate to inch up from 9.4% to 9.6%.

"The U.S. economy is no longer in freefall, but we aren't at the bottom yet," Alec Young, S&P's equity strategist, wrote on June 26. Young doesn't expect to see stocks moving solidly higher until the economy shows real signs of improvement. "Fundamentals need time to catch up with the sharp rise in equity valuations since early March," Young said. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).

The big question is when the economy will show signs of actually improving.

"We're waiting to see what kind of recovery the economy can mount," says independent market strategist Doug Peta. For now, he says, the economy appears to be getting worse at a slower pace, and that supported stocks in the March-to-May rally. "Stocks will be in a holding period until we see the next step for the economy," Peta says.

Earnings Season

Along with economic indicators, corporate earnings season could also push stocks out of their recent trading range—for better or worse. For many companies, the second quarter ends on June 30. Companies start reporting results on July 8, when Alcoa (AA) kicks off the earnings season.

Expectations are low for corporate profits. According to Thomson Reuters (TRI) on June 26, analysts expect S&P 500 earnings to fall 34.9% from last year. But Cardillo says the actual earnings numbers matter less than the tone that executives adopt while unveiling results. "Have things improved? Are they feeling better about business conditions?" Cardillo wonders.

Many investors are assuming the economy and earnings will rebound at the end of 2009 or beginning of 2010, Rovelli says. He wonders if executives' guidance for the coming year will support that optimism. "If we get tepid results, we're going to see a correction in the market," he says.

The stock market is notorious for taking unexpected turns. But for now, investors appear less jumpy than they have been in months. With economic data still mediocre and a full earnings picture a few weeks away, they seem to be patiently watching and waiting for a catalyst that can push the market in a new direction. Until then, Wall Street may enjoy a quiet summer.

Steverman is a reporter for BusinessWeek's Investing channel.

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