More Downside Seen For Markets as Fear Replaces Optimism

New York. US stocks face more turbulence that could send indexes spiraling through key levels this week as doubts about the pace of the global recovery persist and fears over Europe’s sovereign debt woes rattle sentiment.

Investors worry debt problems will hinder efforts to sustain the nascent economic recovery and undermine confidence in the stability of governments that stand behind the euro.

With the Dow briefly dipping back below 10,000 and the benchmark S&P 500 down 7.3 percent from its 15-month closing peak on Jan. 19, money managers and analysts say there is a growing sense that the US stock market’s rally from the lows of March 2009 has all but run its course.

“I am in a camp that believes we’re in a correction. The mood has turned short-term negative,” said Eric Kuby, chief investment officer at NorthStar Investment Management in Chicago. “The general trend for more than nine months has been for the market to rally, but now it seems as if enthusiasm has abated. It’s hard for the market to move forward.”

Investors had bet the start of 2010 would show that the recovery was gaining momentum, but their optimism has been met with more signs of turbulence in the labor market and by worry over possible contagion from fiscal upheaval in Greece, Portugal and Spain. As a result, the euro has fallen sharply against the US dollar due to risk aversion, hurting stocks and the prices of global commodities.

On Friday, the benchmark S&P 500 capped its fourth straight weekly decline, falling 0.7 percent. The Dow dropped 0.6 percent and the Nasdaq shed 0.3 percent.

“The markets are not taking any prisoners. They’re not looking at things as isolated incidents. They’re looking at this as the spreading of a contagion,” said John Praveen, chief investment strategist at Prudential International Investments Advisers in New Jersey.

Worries about the Obama administration’s plans for banking and health care reform added to the bearishness, as did uneasiness over the United States’ own ballooning fiscal deficit and unemployment.

There are also signs that China is looking to curb lending to prevent its economy from overheating, which risks derailing the global recovery if stimulus was withdrawn too soon.

All told, the correction was long anticipated, but there is uncertainty about how far it will go. The technical damage from the latest correction briefly drove the Dow below 10,000 on Thursday and Friday, but the index has yet to close under that level.

Meanwhile, the S&P 500 has broken through key support at 1,085 and slid as low as 1,044.50 on Friday before rebounding late in the day.

Market technicians have warned that further downside could take the S&P 500 as low as 1,036 — a level that will signify the “textbook” 10 percent correction from the Jan. 19 closing peak.

But investors could again look for opportunities in the days ahead to scour the market for stocks whose prices have been pushed down to attractive levels. Late on Friday, there was some evidence of investors snapping up beaten-down shares as technology and materials sectors led a last-minute bounce.

“Corrections are like diets. They’re never really pleasant, you kind of dread them, but at the end of the year, you look better and you feel healthy,” said Ron Florance, director of asset allocation and strategy for Wells Fargo Private Bank.

The highlight on the economic calendar this week is set to be the Commerce Department’s January retail sales report on Thursday, along with December business inventories and weekly jobless claims.

Particular attention will be paid to Federal Reserve Chairman Ben Bernanke, who is scheduled to testify before the House Financial Services Committee on Wednesday. The hearing will explore the unwinding of the Fed’s emergency programs.

The stream of fourth-quarter earnings will continue. Next week’s focus will shift to more consumer-oriented companies.

 

Reuters

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