Publications
Partners
New York - A resurgent Wall Street faces a challenge in the coming week with results of "stress tests" of the banking system and unemployment data expected to reveal more massive job losses.
But despite bleak news expected, some analysts say investors are looking further ahead toward recovery from the deep recession.
"Economic growth appears set to turn into positive territory near midyear, in line with our forecast," says Barclays Capital economist Dean Maki, arguing that the downward spiral in financial markets and economy appears to be ending.
"One of the regularities of the business cycle is that financial markets improve before the economy, as investors look ahead to improving earnings," he said.
"This market improvement in turn helps the economy to recover by lowering borrowing costs for businesses and bolstering confidence. This positive feedback loop appears to be in place now."
The main indexes resumed their upward trend in the past week, as the broad market rose for the seventh of the past eight weeks.
The Dow Jones Industrial Average climbed 1.68% for the week to 8,212.41, and has surged a stunning 25% since lows in early March.
The technology-heavy Nasdaq composite added 1.47% to 1,719.20 on the week and the broad-market Standard & Poor's 500 index increased 1.3% to 877.52.
The market opened the month of May on a positive note after April produced powerful gains, lifting the Dow 7.3%, the Nasdaq a hefty 12.3% and the S&P by 9.4%.
One key for the market in the coming week will be the release of information about the government's stress tests of 19 major banks to determine if they need additional capital. Authorities are expected to release results on Thursday.
Reports suggest at least some of the banks may be short on capital, crimping their ability to lend and fuel economic growth under an adverse economic scenario.
Worst-case scenario
"The recent rally in most of the largest banks may quickly end if several banks involved in the stress test are shown to need a significant amount of additional capital," said Fred Dickson at DA Davidson & Co.
"Reports leaked out last week that as many as six of the nineteen banks involved in the stress test need additional capital."
Martin Weiss at Weiss Research said the government's assumption of an "adverse" scenario of a 3.3% economic decline in 2009 was too optimistic, especially in light of data showing a 6.1% pace of decline in first quarter gross domestic product (GDP).
He said the worst-case scenario of 8.9% unemployment for 2009 "could be reached far sooner than previously expected" and added: "It will take a miracle to achieve a GDP decline of less than 4.0%."
The government's report on Friday on April unemployment will provide an indication if the economy can regain momentum. If job losses accelerate, consumer spending and capital investment may fall further, imperiling a recovery.
Analysts expect another 620 000 job losses and an unemployment rate rising to 8.9% from 8.5% in March.
Sal Guatieri at BMO Capital Markets said investors should not celebrate an economic recovery too early.
"Policymakers have averted a depression, and the downturn appears to be ebbing, which is a prerequisite for expansion," he said. "But no one should be under the illusion that the subsequent recovery will be anything but lukewarm."
Bonds extended their losses on the shift to equities in the past week. The yield on the 10-year US Treasury bond rose to 3.174% from 2.996% a week earlier and that on the 30-year bond increased to 4.088% from 3.876%. Bond yields and prices move in opposite directions.
Kevin Giddis, analyst at Morgan Keegan, said the rise in bond yields is potentially troublesome in light of the massive effort by the Federal Reserve to bring down rates through debt purchases.
But he said this also may indicate the economy can support higher rates and that investors are willing to move into more risky stocks.
"The stock market continues to drag money away from the safe-haven trade," he said.
"There are a number of signs that suggest that investors are looking for, and getting more comfortable taking additional risk to achieve a higher return. That gives me hope."
- AFP
