As caution creeps back into Wall Street, investors have pulled back to consolidate recent hefty gains amid questions about whether stocks have hit their peak for 2009.
Losses in the past week came after a historic rally of some 50 percent for the broad market, but also amid jitters about the "September effect" reflecting a historical trend of a weak period and last year's market calamity in September.
Going into the US Labour Day holiday weekend, the blue chip Dow Jones Industrial Average fell 1.18 percent for the week to end at 9.441.27. The technology-heavy Nasdaq composite dipped 0.49 percent to 2,018.78 and the broad-market Standard & Poor's 500 index pulled back 1.22 percent to 1,016.40. With the broad market still up around 50 percent from lows in early March, some analysts argue that stocks have risen too far too fast over the past six months.
David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, said the market appears to be entering a new phase, having shifted its view from a contracting economy to one that is growing again.
"For months, the equity market had this uncanny ability to rally on any good news, as the psychology took hold that less-negative data was a positive," Rosenberg said. "But having gone from pricing in a drop of 2.5 percent in real GDP (gross domestic product) at the lows to a rise of 4.0 percent now, it looks like Mr Market is becoming a little more discerning in terms of interpreting the economic data."
Doug Kass at Seabreeze Partners recently argued that stocks had hit their highs for the year in late August, saying that the bull market was "in complacency," as "optimism and a boisterous enthusiasm reigns."
But others contend that the market, which remains more than 30 percent below peaks of 2007, can resume its upward track after a pause to consolidate. Fred Dickson, chief market strategist at DA Davidson & Co, said he expects the S&P index to gain another five percent this year amid an improving economy.
"Over the next three months we are looking for the stock market to experience a series of minor rallies followed by short, shallow dips as investors continue to look for even slight pullbacks to raise equity exposure," he said. The market struggled to interpret the past week's biggest economic news, showing a loss of 216,000 jobs as the US unemployment rate hit a fresh 26-year high of 9.7 percent.
While this was better than expected and showed some healing in the economy, it failed to inspire confidence in a strong economic rebound. "All indications are that US real GDP growth will turn positive again during the third quarter of this year, but the recession lives on in the labour market," said Meny Grauman at CIBC World Markets. Brian Wesbury at First Trust Portfolios said the data suggests the economy is quickly gaining momentum after a brutal recession.
"The economy is in a V-shaped recovery," he said. "Given the deepness of the recession and the fact that employment tends to be a lagging indicator, it will take time for the economic recovery to translate into job gains, but we believe payrolls will start expanding by the end of this year." Dean Maki at Barclays Capital also sees an economy that will surprise to the upside.
"The economic data continue to reinforce our forecast of a solid recovery, pointing to robust growth in manufacturing output, housing, and real exports, and we expect these forces to propel a substantial rebound in growth over the next year," he said. "While the labour market is still showing significant job losses, the August employment report showed a continued slowing in their pace, and we expect job growth to turn positive by year-end as the recovery becomes entrenched and businesses feel more comfortable hiring. Indeed, we think the main risk is that the recovery is even stronger than we have forecast."
Bonds were mixed for the week. The yield on the 10-year Treasury bonds fell to 3.442 percent Friday from 3.451 percent a week earlier and that on the 30-year bond rose to 4.273 percent from 4.208 percent. Bond yields and prices move in opposite directions.
The economic calendar is light in the holiday-shortened week opening Tuesday. The market will receive the Federal Reserve Beige Book survey on the US economy and data on the US trade balance.