Oil's down, stocks are up, but uncertainty remains

Monday, August 18, 2008

NEW YORK — The past four weeks on Wall Street have been quite a welcome contrast. Stocks have risen, the dollar has strengthened and oil prices have plummeted.

Investors are not sure yet, however, if it's a turnaround with staying power or just a temporary reversal.

Market bears would argue that economic readings are still weak, particularly for the average U.S. consumer. Other countries' economies are declining, too, and the credit markets that companies rely on to borrow and lend remain tight.

But on the more positive side, prices for commodities including oil are much lower than they were a month ago. The housing market, though probably not due for recovery anytime soon, is showing signs of bottoming. And the stock market tends to rebound before the economy does.

It's easy to argue both sides; it's harder for an investor to decide where to put his money. That's why many market analysts are predicting that stocks are going to stay volatile for a while longer.

Back-and-forth movements are typical when the market is trying to put in a bottom, said Scott Wren, equity strategist for Wachovia Securities. Plus, he said, "you're getting a lot of mixed news."

Last week, after seesawing, the Dow Jones industrial average finished down 0.63. The Standard & Poor's 500 index ended the week up 0.15 percent, and the Nasdaq composite index rose 1.59 percent.

This week, investors will keep monitoring the energy markets, and also see how the housing industry is faring in the National Association of Home Builder's index on Monday and the Commerce Department's Tuesday report on July new home construction.

At the same time, Wall Street will be gauging the financial health of consumers in the earnings reports of retailers including Home Depot Inc., Target Corp., Gap Inc. and BJ's Wholesale Club.

Consumers have been buying fewer items, in general, because prices have been rising. Last week, the Labor Department reported a hefty 0.8 percent increase in consumer prices for July.

Wall Street's hope is that the pullback in oil will alleviate some of these pressures — but some economists believe that even if commodities stay down from their recent highs, it won't be enough to shield consumers from unmanageable prices.

"It's too early to be overly confident about the economy," said Dan Laufenberg, chief economist for Ameriprise Financial. "I still think inflation is the greatest risk to the economy."

He noted that while oil prices are down sharply from their mid-July record, they are still about 50 percent higher than a year ago. Moreover, he said, "inflation is starting to spill over into other goods and services."

And because the job market tends to influence consumer spending even more than home, fuel or food prices, Wall Street has been nervous that the job market has shown few indications that it is improving.

The Labor Department disappointed the market last week when it reported a smaller-than-anticipated decline in the prior week's claims for unemployment. Another downbeat reading on unemployment this week could worry investors even more.

And lastly — though certainly at the front of investors' minds — is the situation with the still-stumbling global banking system. Banks such as JPMorgan Chase & Co. and UBS AG last week augured further credit losses, while banking industry analysts reduced their earnings estimates again in anticipation of more dismal profits in the third quarter.

"A year from today, we'll still be talking about financial problems. It's not going away," said Alexander Paris, economist and market analyst for Chicago-based Barrington Research. "You're going to have a lot more bank failures."

But, he added, the stocks of financial services companies have fallen so much already, and the banks themselves have written down the value of their investments by more than $300 billion and racked up a heap of credit losses.

"At some point," he said, "bad news is all discounted."

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