Will Economic Data Lift Stocks?

Sun January 5, 2003 09:03 AM ET By Philip Klein

NEW YORK (Reuters) - Stocks could get a boost from positive economic signals this week as the trading year begins in earnest, but fears over international trouble spots Iraq, North Korea and Venezuela will likely temper gains.

Investors are optimistic that 2003 will break the three-year losing streak of major market indexes, and stocks got a head start on Thursday after an upbeat report on December manufacturing sparked one of the strongest opening days ever.

When traders return for the first full week of the year they will be closely watching data on the service sector due on Monday and unemployment figures due on Friday, hoping they will show that last week's positive economic news was no fluke.

"Investor psychology is hoping for a positive '03," said Tim Heekin, director of trading at Thomas Weisel Partners. "I think early on in the year people are going to look to put a little money to work, and I'd like to think we'll have a nice 2 percent to 5 percent move up next week."

For the holiday-shortened week, the Dow Jones industrials .DJI were up 3.6 percent, the S&P 500 .SPX was up 3.8 percent and the NASDAQ .IXIC ended 2.9 percent higher.

President Bush is expected to unveil an economic stimulus package on Tuesday that could include tax cuts on stock dividends.

But uncertainty about expected U.S.-led military action in Iraq, confrontation between the United States and North Korea over nuclear arms and political upheaval in Venezuela will be hanging over the market.

"Based on the landscape globally, even though we do have an improving economy, we're going to see sideways movement and that's all," said Jack Francis, senior trader at UBS Warburg.

WEEK ONE

Next week, investors are expecting volume to improve with institutions returning to full staffing levels after the last two trading weeks were split in half by the Christmas and New Year's holidays.

With signs that the economy is improving and sentiment that the flood of corporate scandals is over, market watchers are optimistic that this will be the first up year for stocks since 1999.

ECONOMIC SIGNALS

The Institute for Supply Management's manufacturing index was well above expectations and spurred a rally on Thursday.

But the report left many analysts questioning whether the numbers reflected real strength in the economy or an aberration.

They may get answers next week when the ISM's report on the service sector is released Monday. If it mirrors the strong manufacturing data, markets could get off to a good start, but a negative report would likely be a major drag on stocks.

"If that number comes out disappointing, you'll probably see indexes test their December lows," said Tom Schrader, head of listed trading at Legg Mason Wood Walker.

As for Friday's release of December unemployment figures, the jobless rate is expected to remain at an 8-year high of 6 percent.

MAJOR CONFLICTS

Schrader said the biggest factor keeping the market down now is that three international crises are happening at the same time -- in Iraq, North Korea and Venezuela.

"It's a general dark cloud, and as much as the Bush administration is trying to play it down, what worries people most is North Korea," Schrader said. "I think most people think we can go in and take care of Saddam Hussein pretty quickly."

The situation in Venezuela is particularly troubling because labor strikes by opposition groups have choked oil shipments from the world's No. 5 oil exporter, driving up the price of crude.

NYMEX crude oil futures ended 4 percent higher Friday at $33.08 a barrel, the highest in more than two years.

"If oil prices remain high, there is clearly a threat to economic recovery in the United States," said Alan Ackerman, senior vice president and strategist at Fahnestock & Co.

Ackerman also said markets will be eagerly awaiting the details of the Bush economic plan and the strength of opposition to it.

Corporate quarterly earnings reports will begin to trickle in next week as well, including Dow component Alcoa Inc. AA.N . But investors will be especially sensitive to any profit warnings and outlooks for the year.

On Thursday, retailers will report their sales at stores open at least a year for a December holiday shopping season that is seen to have the lowest gains in decades.

But, after warnings by Wal-Mart Stores Inc. WMT.N and Home Depot Inc. HD.N , investors believe that much of the bad news is already reflected in the market.

"It was a so-so Christmas. Everybody knows it and all negative news is probably placed in," Francis said