The Coming Week: Market Eyes Iraq

Stocks may slip back into a selling pattern next week, as concerns about a potential confrontation with Iraq, in addition to uncertainty about earnings and economic outlooks, weigh on the market.

"I expect that we will see more of the same, a down market with technical and short-covering rallies, until we get a definitive decision on Iraq," said Jim Volk, head of institutional trading at D.A. Davidson.

This past week, the Dow Jones Industrial Average ended down 66.72 points, or 0.80%, at 8312.69, while the Nasdaq closed up 11.72 points, or 0.92% higher, at 1291.40. The S&P 500 finished up 2.90 points, or 0.33%, at 889.81.

On Thursday, President Bush stepped up his determination for a tough resolution against Iraq before the United Nations, saying Saddam Hussein has likely produced weapons of mass destruction. The president also criticized Democrats who have asked him to wait for the U.N. before making a decision.

The president's comments caused some anxiety in the market, and subsequent earnings warnings from Lucent (LU Quote - Cramer on LU - Stock Picks) and Honeywell (HON Quote - Cramer on HON - Stock Picks) didn't help.

"There is no catalyst to get people excited or to bring aggressive buyers into the market," said Volk.

Earnings Jitters

Monday marks the beginning of the third-quarter earnings preannouncement season, which is likely to add to investor jitters. The market also will take its cues from earnings results, which will include Morgan Stanley (MWD Quote - Cramer on MWD - Stock Picks), Best Buy (BBY Quote - Cramer on BBY - Stock Picks), Oracle (ORCL Quote - Cramer on ORCL - Stock Picks), Bear Stearns (BSC Quote - Cramer on BSC - Stock Picks) and FedEx (FDX Quote - Cramer on FDX - Stock Picks).

Several economic indicators -- business inventories, industrial production, the consumer price index, housing starts and the Philadelphia Fed survey -- are also slated for release next week.

For the most part, prognosticators are calling for flat readings in the coming week's economic data. In a speech on Thursday, Federal Reserve Chairman Alan Greenspan said "depressing effects still linger" in the economy, the result of a set of blows it has withstood over the past year. Earlier in the week, the Fed's Beige Book survey of 12 bank regions suggested the economy is recovering only sporadically.

Retail Growth

"These days the only area where you see strong data is consumption indicators," said Ethan Harris, an economist at Lehman Brothers. "Retail data have been good, but most others have not been so good."

Despite the weakness, economists are optimistic about overall growth in the third quarter, with some forecasting that gross domestic product will be up 4% after rising 1.1% in the second quarter and 5% in the first.

"It will be a long time before we can talk about high margins and low unemployment," said Steven Wieting, an economist at Salomon Smith Barney. "But the economy can grow even though it is weak."