By Wallace Witkowski
As a stellar earnings season draws to a close, a worsening jobs
situation and fears of a double-dip recession may weigh upon U.S.
investors this coming week.
Investors are grappling with the growing disconnect between
strong corporate earnings and a faltering U.S. economy. Currently,
75% of the 484 companies in the S&P 500 that have reported have
beaten Wall Street expectations, compared with a quarterly average
of 62%, according to Thomson Reuters.
That's done little to move the market. The S&P 500 Index
(SPX) has shed about 0.1% since earnings season kicked off July 12.
Over the past week, the S&P 500 fell 0.7% to close at 1,072;
the Dow shed 0.9% to close at 10,214; and the Nasdaq Composite
Index (RIXF) rose 0.3% to close at 2,180.
Six S&P 500 companies report in the coming week. On Tuesday,
Medtronic Inc. (MDT) and Big Lots Inc. (BIG) report quarterly
results. On Wednesday, JDS Uniphase Corp. (JDSUD) reports. Thursday
brings Novell Inc. (NOVL) and Patterson Cos. (PDCO), and on Friday,
Tiffany and Co. (TIF) reports.
Job growth, or the lack of it, remains the focus. Thursday saw a
surprise jump in initial jobless claims to 500,000, with those
numbers subject to revision this coming Thursday. Coupled with an
anticipated downward revision to the second-quarter gross domestic
product, many are wondering if these indicators will be the one-two
punch that derails the economy.
Channing Smith, co-manager of the Capital Advisors Growth Fund,
said these economic indicators are going to be the key market mover
next week.
"We'll see if the 500,000 figure was an anomaly or something
more troubling," Smith said. "But the GDP number is going to be
very critical in the debate on whether we are seeing a weak
recovery or a double dip."
Frank Ingarra, portfolio manager at Hennessy Funds, said markets
have been trading on headlines recently rather than company
fundamentals because of a lack of clarity on the economy.
"The awful jobs numbers kicked everyone in the teeth," Ingarra
said. "Companies are flush with cash, but they're not hiring."
Companies are slow to hire because they are still unclear on how
much health-care reform is going to cost per employee, Ingarra
said. As a result, companies are more inclined to put that money
into mergers and acquisitions to grow, with the net result being
more job loss than creation, he said.
That trend made big headlines in the past week with BHP
Billiton's (BHP) $38.6 billion hostile bid for Potash Corp. (POT);
Intel Corp.'s (INTC) $7.7 billion bid for McAfee Inc. (MFE); and
Rank Group's $4.6 billion bid for Pactiv Corp. (PTV).
Also, on Friday, Fed Chairman Ben Bernanke is set to speak at
the Kansas City Federal Reserve Bank's annual retreat in Jackson
Hole, Wyo. Bernanke is scheduled to provide his economic outlook
and the Fed's response. Fed watchers will be looking for whether
that will lead to a second round of quantitative easing.
On the positive side, Smith said that if one separates the
market from the economy, the backdrop for the market is very
attractive because of low interest rates, benign inflation and a
good earnings season.
"Stocks are very attractive," Smith said. "You have to be
selective because we expect volatility. But if we get a sovereign
default, then all bets are off."