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Coming Week: Shaky Ground

Gregg Greenberg

As questions regarding the strength of the economy mount, the coming week may provide some answers.

The bond market continues to say the economy is weak, as evidenced by the recent drop in the benchmark 10-year Treasury yield to an 11-month low. On the other hand, the stock market, which is traditionally a leading indicator, is barely off its highs.

The major indices did move lower last week as economic worries began to take hold. The Dow fell 86 points, or 0.7%, its second losing week in a row. The S&P 500 gave back 4 points, or 0.3%, for the week, while the Nasdaq dropped 47 points, or 1.9%.

Meanwhile, the dollar is declining against the euro, theoretically because interest rates are "too low" in the U.S. However, Fed officials are maintaining a hawkish tone and insist that inflation remains a concern, probably because stocks and commodities prices are still high.

"How does the dilemma resolve?," asks Phil Roth, chief technical market analyst at Miller Tabak. "A big hit in bonds would be one resolution. But that becomes increasingly unlikely if stocks are struggling. The other is a quick smash in stocks, which would allow the Fed to talk dovish again."

Roth says the next few days may tell the tale. The market will get some more key pieces to the economic puzzle in the coming week, culminating in the November jobs report on Friday.

On Tuesday, factory orders for October will be released. Economists expect a drop of 2%, compared with a rise of 2.1% in September.

"After the dismal October durable goods number last week, it would not be surprising to see a very sour factory orders figure on Tuesday," says Jason Schenker, economist at Wachovia. "This would be another bearish indicator signaling slower growth ahead, and potentially a first-quarter rate cut."

The Institute for Supply Management services index for November also arrives on Tuesday. The market expects a reading of 56.5, down from 57.1 last month.

On Thursday, October consumer credit will be in the spotlight. According to Thomson First Call, economists expect credit to rise by $4.5 billion, compared with a $1.2 billion drop in September.

The all-important November non-farm payroll data should dominate early trading on Friday. Economists project that 125,000 jobs were added during the month, up from 92,000 in October.

The unemployment rate is expected to remain steady at 4.4% and the average work week is predicted to stay at 33.9 hours. Hourly earnings are forecast to rise 0.3%, compared with growth of 0.4% in October.

"While employment trends tend to lag the economy, a stronger reading and upward revision will act as a counterbalance to the recent concerns that the economy is slowing too quickly, likely allowing the market to move higher," says Robert Pavlik, chief investment officer at Oaktree Asset Management. "Conversely, a number, which is below the consensus estimate, will cause the markets additional concern and will likely weight on stock prices."

Earnings of Interest

Much of recent concern about the economy has to do with the weak housing market, and the earnings report from luxury-home builder Toll Brothers (TOL Quote) Tuesday could provide more insight into the current state of real estate.

Toll already warned in early November that it doesn't yet see a bottom to the housing market's decline. At the time, the company reported that its revenue for the quarter, ended Oct. 31, fell 10% from a year ago to $1.81 billion.

According to Thomson First Call, analysts expect the homebuilder to post earnings of $1.06 a share for the period when it reports on Tuesday, down from $1.84 last year.

Also on Tuesday, the market will hear from the likes of AutoZone(AZO Quote), Sycamore Networks(SCMR Quote) and Novell(NOVL Quote).

The rest of the week is fairly light in terms of earnings. Among the companies reporting Wednesday are Tweeter(TWTR Quote) and Korn Ferry (KFY Quote).

On Thursday, the market will hear from Movado(MOV Quote), Jos. A Bank Clothiers(JOSB Quote) and National Semiconductor(NSM Quote).

Toronto Dominion Bank(TD Quote) and Global Crossing(GLBC Quote) will be Friday's earnings highlights.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting