Monday, November 17, 2008

The Six Unknowns That Are Roiling the Stock Market

The Six Unknowns That Are Roiling the Stock Market

The stock market's behavior is downright strange lately. Professionals with decades of market experience scratch their heads as the market falls to its lowest point of the year, then surges almost 7% in an afternoon—all for no apparent reason.

What's hanging over the stock market these days is uncertainty. In an environment where few know what's next, investors are skittish, corporate executives are cautious, and government officials are trying anything and everything to stabilize the situation.

BusinessWeek asked stock market experts to identify the biggest unknowns facing investors. These factors will be crucial to clearing up a foggy outlook. Unfortunately, it could take months—if not years—to resolve them.

1. Will the market lows hold?

On Nov. 13, the broad S&P 500 index and the tech-heavy Nasdaq composite dipped to their lowest points of the year. The Dow Jones industrial average got close, sliding below the key level of 8000. Then, however, buyers flooded the market and all three indices jumped more than 6%, mostly in the last 50 minutes of trading.

Randy Frederick, Charles Schwab's (SCHW) director of trading and derivatives, points out that this has happened roughly four times in the past two months: The market keeps returning to its lows, then rebounding. "It's actually an encouraging sign," he says. "The danger is if we dip below that."

Traders who rely on technical analysis—that is, watching the stock market's past patterns to predict future moves—could be unnerved by a significant drop below these levels. "That's when things will get spooky," he says.

2. What will President Obama do?

The victory of Barack Obama on Nov. 4 settled one unknown. Investors know who will be President on Jan. 20, 2009—they're just not sure what he's going to do.

"You have a new administration coming in, and nobody knows what the new rules are going to be," says James Reed, portfolio manager of the UMB Scout Fund (UMBSX). Hanging in the balance are efforts to stimulate the economy and end the credit crunch, taxes, health care policy, and new regulations for the financial industry.

"It will be interesting to see in the president's first 100 days how much of the changes he advocated can be implemented," says Richard Sparks of Schaeffer's Investment Research.

3. How bad will the layoffs be?

In October the U.S. unemployment rate rose from 6.1% to 6.5% and the consensus is that it will continue to climb. But how far and how fast?

Many companies have announced job cuts in the past month and the beginning of 2009 may be a crucial period. Firms are putting together budgets for next year, Reed says, and he's expecting "whopping layoffs in the first quarter."

The unemployment rate is "the key data point that everyone is watching," says Steve Neimeth, portfolio manager at AIG SunAmerica Asset Management. If the rate moves above 8%, consumers could slash their spending, and the economic recovery some hope to see in 2009 could be delayed, he says.

4. How happy will the holidays be?

Stressed out by the economic headlines, stock market losses, falling home values, and a precarious job market, consumers seem in no mood to spend during this holiday season. Nearly every retailer has lowered sales expectations.

"Expectations have been set very low," says Frederick. Holiday spending that beats the gloomy estimatescould boost retail stocks and the market as a whole.

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