Market rally, economic growth depend on consumer
NEW YORK: Now that housing and even unemployment are showing signs of improvement, Wall Street wants consumers to do their part to heal the economy.
Investors get some insight this week into how consumers are spending from a government report on July retail sales. They'll also find out if consumers helped major retailers including Wal-Mart Stores Inc. and Macy's Inc. join the stream of companies that reported better-than-expected second-quarter earnings and forecasts.
"What we'll see now is close attention to consumer behavior," said Joe Heider, president of Dawson Wealth Management in Cleveland.
Analysts say investors need to see evidence that consumer spending is picking up before they'll keep the market's summer rally going. Despite signs the recession is easing, investors are still worried that consumers, whose spending accounts for 70 percent of all U.S. economic activity, could hurt the economy's chances for a robust recovery if they continue to limit what they buy.
The stock market has soared in the last month as reports showed steady increases in home sales, improving corporate earnings and a stabilization in the manufacturing industry. On Friday, investors cheered an unexpected dip in the unemployment rate.
The Standard & Poor's 500 index is up 15 percent in just four weeks and 49 percent from a 12-year low in early March. All the major indexes now stand at their highest levels since last fall.
Lackluster sales reports from some of the nation's retailers last week were a reminder that consumers are still nervous. But Friday's surprisingly positive employment report, which showed job losses slowed last month and the unemployment rate fell to 9.4 percent from 9.5 percent in June, could signal brighter days. If job losses are stabilizing, that should give consumers more confidence to buy beyond their basic needs.
One potential problem that could deter consumers and stifle the economy's rebound is rising interest rates. As the economy improves, the Federal Reserve may be forced to raise its benchmark federal funds rate, which stands at a record low of near zero, to prevent a surge in inflation. That would force up borrowing costs including mortgage rates.
Linda Duessel, equity market strategist at Federated Investors, said these fears could weigh on the market, especially as the Fed readies for a two-day meeting that begins Tuesday.
"The people that are going to look for an excuse to pull this market back might look at the fear of the Fed raising rates too soon," she said.
Still, expectations are for the Fed to keep rates steady at least through the end of the year. Investors, though, will be watching closely for any changes in the Fed's assessment of the economy that accompanies its interest rate decision. Up until now, the Fed's stance has been cautiously optimistic, warning that growth will be slow and controlled.
The market will also want to see how well Treasury auctions go this week. The Treasury Department is issuing $75 billion of long-term notes as part of its ongoing effort to fund the government's stimulus programs. Treasurys have tended to sell off ahead of the auctions, which drives yields higher, as investors fear there won't be enough demand to support the flood of supply. Long-term Treasury yields are closely tied to rates on mortgages and other types of loans, so when yields creep higher, investors get nervous.
So far, the auctions have been going relatively smoothly.
Aside from the risks posed by a slack in consumer spending and higher interest rates, the traditional summer slowdown on Wall Street in August could threaten the market's rally. As traders and investors leave for vacation, there will be lighter trading volume, and therefore increased volatility in the market, especially considering stocks have barely taken a breather after such a considerable run.
"Equities seem to be on a one-way train here," said Todd Colvin, vice president at MF Global. "That sets us up for a potential pullback."