Thursday, January 8, 2009

Stocks: Will the Barrage of Bad News Scare Bulls?

Stocks: Will the Barrage of Bad News Scare Bulls?

Stocks in the past month bounced off their 2008 lows, but keeping that stock market rally going will be a big challenge for Wall Street's bullish investors.

It's not that the bulls' case is wrong. Many argue that, after aggressive actions by the Federal Reserve and the federal government, the U.S. economy will recover by midyear. And that could happen.

Rather, the bulls' problem is so far their hopes are nowhere to be found in reality. In fact, real measures—from earnings results to economic data—continue to deteriorate at a frightening pace.

Anticipating the December Jobs Report

Plenty of scary headlines could have spooked the market in the past month, from a horrible holiday season for retailers to the collapse of Bernard Madoff's $50 billion hedge fund. However, the market is "almost ignoring the news," says Richard Sparks of Schaeffer's Investment Research.

The broad Standard & Poor's 500-stock index is up more than 20% from its lows of late November. For now, Sparks says, "that uptrend is in place, but I think it's tenuous."

Economic realities could knock stock market optimists off their stride. A key moment will be Jan. 9, when the Labor Dept.'s December employment report is expected to show massive job losses. Economists expect the unemployment rate to jump from 6.7% to 7%, and the U.S. to lose another half a million jobs.

Quincy Krosby, chief investment strategist at the Hartford (HIG), says most professional investors already expect "really ugly" economic data from both the fourth quarter of 2008 and early 2009.

"If [the jobs report is] much uglier than that, we'll see how the market absorbs it," she says. Investors could be spooked if a weak jobs report indicates economic stabilization is even further away.

Action Economics Chief Economist Michael Englund assumes the U.S. unemployment rate could reach 8.6% by the middle of 2009, but then start to recover. Recent estimates by the Congressional Budget Office are especially gloomy: The CBO says the jobless rate could average 8.3% for all of 2009 and average 9% in 2010.

Angst Is Factored In

It's not surprising the market can shrug off gloomy news. After all, the S&P 500 dropped almost 39% in 2008, so investors expect tough times.

"A lot of angst has already been factored into the stock market," says Gary Wolfer, chief economist at Univest Wealth Management (UVSP). But, he adds, "we're still in for a rough patch in the first half of 2009."

The market did flinch after a spate of scary headlines on Jan. 7. The U.S. ADP employment report, though often an unreliable gauge, showed a 693,000 decline in December private payrolls. News broke of accounting irregularities at Indian outsourcing firm Satyam Computer Services (SAY). Intel (INTC) warned sales could plummet 20% in the fourth quarter. Alcoa (AA) announced it's cutting 13,500 jobs, or 13% of its workforce, this year.

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