Wall Street's "Teasing Gains"


In case you haven't noticed, stocks have been rallying for the past few weeks. Since mid-August (when only the most die-hard market watchers were paying attention), the Standard & Poor's 500-stock index has climbed 5%, bringing it back into positive territory year-to-date.

The first few trading days after Labor Day -- when ruddy Wall Street types returned from Nantucket and took a look at their portfolios -- have also been encouraging. The Dow Jones Industrial average climbed 82 points on Sept. 7 and fell just 30 points on Sept. 8. This wasn't bad for the day that Federal Reserve Chairman Alan Greenspan gave Congress an upbeat assessment of the U.S. economy, signaling that more interest rate hikes could be coming. And it came the day after the death toll of U.S. soldiers in Iraq reached 1,000.

Best of all, both days saw volume of 1.2 billion shares traded on the New York Stock Exchange -- a substantial pickup from the dog days of August -- which means some institutional muscle is building behind the gains.

"AWFULLY HARD." So far, this amounts to a collective sigh of relief by investors as several hurdles to higher stock prices are cleared. The price of crude oil has fallen from its peak, the Olympics and both parties' political conventions have passed without terrorist incident, and the economy has started to claw its way out of its summer "soft patch," in Greenspan's terms.

The real testing ground for September is yet to come, however. Barry Ritholtz, market strategist at Maxim Group in Woodbury, N.Y., calls these just "teasing gains" so far. He'd like to see daily volume on the NYSE reach the level of 1.4 billion to 1.6 billion shares before he's sure that big institutional investors are back. "The next couple of weeks will tell us how the rest of the year will go," he says. Ritholtz, like many strategists, is hesitant to get very bullish just yet since some significant obstacles for the market remain.

"We're climbing a wall of worry while looking over our shoulder," says Susan Fulton, a principal at investment-management firm WealthTrust in Bethesda, Md. "It's awfully hard to do that."

WHITHER CONSUMERS? One event on investors' minds -- the Federal Reserve meeting that's right around the corner on Sept. 21. While investors had little doubt that the central bank would raise rates a quarter-point at the last two meetings -- which the Fed did -- they're not so sure what the Fed will do this time around.

Greenspan's Sept. 8 comments that the economy had "regained some traction" sparked speculation that another rate hike is in the offing (see BW Online, 9/9/04, "Why Greenspan Is Staying the Course"). Some believe it would be a major negative for the market if the Fed raises rates as economic conditions appear to be weakening, a scenario suggested by some recent data, such as August's slack retail sales figures.

On the heels of the central bank's meeting comes the third quarter's earnings-preannouncement season. This is when all the companies that suffered the economy's July and August weakness will have to fess up. Strategists don't expect it to be pretty. Some warn that the market could return to its mid-August lows if reports are worse than expected.

TRACKING BUSH. Beyond these developments, investors need to keep an eye on frazzled consumers. Already, their spending shows signs of a retrenchment due to higher gasoline prices, acting as a tax that hits lower earners the hardest, says Fulton. She points to Wal-Mart's (WMT) slowing rate of same-store sales growth. No. 1 chipmaker Intel's (INTC) recent revenue warning signifies another weak spot.

Labor-market conditions, a key to consumer spending, will be watched closely throughout the month. Nonfarm payrolls rose by 144,000 in August, which wasn't too bad, but any spike in first-time unemployment claims would cause more worry about whether consumers are tapped out.

The Presidential election is the ultimate hurdle to pass before stocks can rally. Not only does Wall Street hate uncertainty over who will win but investors also worry about a terrorist incident in the run-up to November. Gail Dudack, chief investment strategist at Sungard Institutional Brokerage, points to the first debate on Sept. 30 as the "defining moment" for cementing President Bush's reelection prospects and signaling the market's near-term direction. It has tracked Bush's performance in the polls to a surprising degree in recent months.

BACKWARD STEPS? Nick Bohnsack, a strategist with ISI Portfolio Strategy & Investment, believes stocks will rise in the coming months as remaining barriers to investor confidence recede. He expects the S&P 500 to end the year at 1,250, an 11% gain from current levels. "That's not to say it won't take two steps forward, one step back to get there," says Bohnsack, who's optimistic.

But the potential for a major step backward on any of several events in the near future is likely to keep many investors on the sidelines in September. By Amey Stone


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