Wall Street's rally has hit a speed bump as fresh doubts emerge about the notion of a quick recovery for the US economy from its current malaise. Market momentum has taken a hit from skyrocketing crude oil prices and fears that the US and perhaps the global economy could face more turmoil from housing and credit woes.
The Dow Jones Industrial Average slumped 2.4 percent in the week to Friday to 12,745.88 and the Standard & Poor's 500 broad-market index lost 1.8 percent to 1,388.28. The tech-heavy Nasdaq composite shed 1.3 percent for the week to 2,445.52. The pullback after three weeks of gains was not seen as unusual. But some analysts are questioning the notion of a speedy recovery for the ailing US economy, and whether its weakness will spread globally.
Robert Brusca at FAO Economics said a report on the US trade deficit was troublesome. The gap fell to 58.2 billion dollars in March as a result of declining imports, rather than rising exports.
"The US has been trimming its deficit ... That means less stimulus for the rest of the world," Brusca said. "A picture of a slowing world economy can be seen in the snapshot of US trade this month. It's for real. It's contagious. It's a slowdown."
Morgan Stanley economists Richard Berner and David Greenlaw said in a research note that the rally in the stock market reflected "the belief that the worst is over for the economy," but that this may be too rosy a scenario.
"In our view, the recent run of better data does not signal that recession risks are receding," they wrote. "If anything, there is a renewed disconnection between market pricing and our view of the economy: We think the economic fallout and resulting downturn is only beginning."
Fears of more economic turmoil heightened by the spike in crude oil futures, which hit fresh records for most of the week and ended above 125 dollars a barrel. Some analysts said forecasts of a "super spike" to 150 or 200 dollars a barrel are become more credible. "A super-super (oil) spike would most likely put a stake in the heart of global economic growth," said Ed Yardeni at Yardeni Research.
Wall Street will get a snapshot of consumer health in the coming week with a report on April retail sales. Since consumer spending represents some two-thirds of economic activity, this may provide information on whether the US consumer is holding up in the face of an economic storm.
Joseph LaVorgna, chief US economist at Deutsche Bank, said he believes consumers are hurting. "Household buying power this year will be severely crimped by decelerating cash flow, tighter lending standards and less homeowners' equity," he said. "This should keep a lid on consumer spending and by default the economy."
LaVorgna said the government's tax rebates from a 168-billion-dollar economic stimulus plan "will help consumer spending, but we believe they will provide only a temporary fillip to activity." Key data in the coming week include the report on US retail sales Tuesday, consumer inflation data Wednesday and numbers on housing starts on Friday.
On the earnings front, retail leader Wal-Mart and tech group Hewlett-Packard lead a field of companies releasing quarterly results. John Wilson, equity strategist at Morgan Keegan, said the stock market appears to have emerged from its dismal start to 2008 and could get back into rally mode, especially if crude oil prices ease. "The market has cured its oversold levels of a few weeks ago, so some consolidation is probably in the offing," he said.
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