U.S. stocks face resistance from Europe headwinds
SAN FRANCISCO (MarketWatch) -- U.S. stock advances are expected to run into resistance next week, following the longest winning streak since January 2011, as a lack of fresh incentives and opacity in Europe catch up with equities.
The tone and the tenor of the Federal Reserve minutes due on Wednesday will also dictate the market's mood as investors look for more clarity on possible additional economic stimulus measures from the central bank.
"The stock market has enjoyed a nice run in recent weeks, but moving above the April highs may prove to be a challenge. Bull markets, like bear markets, need constant feeding," said Alan Gayle, a senior investment strategist at Ridgeworth Investments. "The current run appears to have been fed by hopes for further global monetary stimulus and Quantitative Easing 3 and a lack of bad news from the EU--not strengthening economic momentum."
Since July 6, the Dow Jones Industrial Average (DJIA) has advanced for six straight weeks for a cumulative 4% rise to 13,275 on Friday, closing in on April's high of 13,316. The S&P 500 (SPX) climbed 4.7% since July 6 to 1,418, near April's peak of 1,422, while the Nasdaq Composite (COMP) added 5.8% during five weeks of gains since July 13 to close at 3,076, inching toward April's high of 3,128.
After a brief intermission, Europe is likely to return to center stage as European leaders once again look for ways to prevent the Greek economy from succumbing to cardiac arrest.
"More important than the economic data will be the political maneuvering," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in a note to clients.
Greek Prime Minister Antonis Samaras plans to meet with President Jean-Claude Juncker of the European Council, German Chancellor Angela Merkel and French President François Hollande in quick succession next week. Samaras will reportedly sound out Merkel on his proposal to stretch the implementation of new austerity measures over four years rather than the two years as previously agreed. Read more on Samaras' meeting with Germany's Merkel
The Greek economy posted a 6.2% year-on-year contraction in the second quarter, making it difficult for the country to improve its balance sheet, according to economists at Rabobank.
Germany and France have taken leading roles in the international effort to resolve Europe's lingering financial problems but the process has been bogged down by politics, particularly in Germany.
On the domestic front, U.S. investors will parse Fed minutes from the July 31-Aug. 1 meeting for hints on where the central bank's bias lies on further easing.
"All eyes will be on any 'cost-benefit analysis' that went on at the August meeting. With that said, expectations for Fed action in September have been pared back recently in light of the July employment and retail sales reports. This, coupled with a decent August employment report, may buy the Fed some more time, lowering the odds of action in September," strategists at RBC Capital Markets said in a report.
Job growth in July exceeded expectations with employment outside the farm sector rising by 163,000 workers, the fastest pace since February.
Sales at U.S. retailers climbed 0.8% in July to a seasonally adjusted $403.9 billion after falling for three months straight.
The Federal Open Market Committee left the federal funds rate target unchanged at zero to 0.25% when it met early August. But the Fed lowered its outlook on the economy, noting that economic activity had decelerated, and promised it "will provide additional accommodation as needed."
Investors will also sift through a raft of housing and manufacturing data for clues on where the economy is headed.
"While the housing data due next week will likely give signs of continued healing from a steep decline, the durable goods orders report will help investors gauge the current health of manufacturing demand," said Gayle.
With the earnings season winding down, corporate news is likely to have less sway on stocks than in previous weeks.
Among notable companies slated to report results next week are
Hewlett-Packard, scheduled for Wednesday, is estimated to have earned 98 cents a share on revenue of $30.19 billion in the fiscal third quarter.
A number of retailers are also on tap to release quarterly results, including Lowe's Cos. (LOW) ,
Of the 474 companies that have reported second-quarter earnings so far, 71% have reported better than expected earnings, while only 42% have reported sales above the mean estimate, said John Butters, senior earnings analyst at FactSet.