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The Coming Week: Welcome Back!

The market's laid-back, siesta-like mood will likely last straight through the coming week as vacationers trickle back from the beach and minor economic data filter through the mix.

Investors will be hoping for more of this week's quietly positive tone that came courtesy of benign economic data. The latest round of numbers soothed inflation fears and drove home the already existing sense that the Fed's tightening work is at or near an end. And, though next week's economic calendar is on the light side, Wednesday's revised productivity numbers and Friday's consumer credit will likely just add a little more fuel to the market's confidence that interest rates aren't going anywhere for a while.

Of course, the flip side of fading inflation worries is concern about corporate profits and earnings growth. But at least a few economists think the Fed has pulled off an impressive balancing act, for the time being, with its series of six rate hikes over the past year.

"The risk is much more symmetrical regarding inflation and a slowdown, even compared with just a few weeks ago," said Lynn Reaser, chief economist and senior market strategist at Banc of America Capital Management Group in St. Louis, adding that she thinks if the Fed had met on Sept. 1, it would have been inclined to adopt a neutral stance.

"The economy does have some factors that will help to keep it on an even keel," said Reaser, noting that long-term rates will support the housing market and predicting that an improving stock market will give some lift to consumer spending. Reaser said she thinks the economy is headed toward 3.5% growth in the second half of the year vs. 5% in the first half. "It should keep earnings growth at a still sizable pace. We are looking for operating EPS growth of 13% to 15%. But the peak growth of the economy and corporate profits is probably past."

Ray Hawkins, vice president of block trading at J.P. Morgan, said that, while he thinks the near-term trend will be positive, investors will likely turn cautious as relief over inflation yields to increasing concerns about slowing profit growth. "All the bad-is-good type numbers that show the economy is slowing will eventually affect earnings and that will hurt a little bit."

Both Hawkins and Reaser agree that the tech sector may be the place investors turn as those concerns take hold. "Looking forward, tech is more of a sexy group to be in as people take money off the top of some Old Economy issues that have performed well," said Hawkins.

"Technology may be the best hedge against the economy slowing," said Reaser, who thinks investors could shy away from retailers, consumer cyclicals and basic materials in the week ahead.

Healthy Move Into Tech

Hawkins said he watched money flow out of health care stocks and into tech stocks in the past week and wouldn't be surprised to see the trend continue in the days ahead.

"There are a fair amount of things that may keep a lid on health care stocks," he said, noting the political arena and the possibility of price controls, as well. He also mentioned patent issues, which could be positive for generic drug producers but negative for heavyweights such as Bristol-Meyers Squibb (BMY) and Eli Lilly (LLY - Get Report). Given that the American Stock Exchange Pharmaceutical Index is up more than 10% in the year to date, some investors might hone in on the chance to take profits now.

Given that there are no major economic data on the horizon right now, economists think the optimism over last Friday's jobs data and manufacturing activity might have a nice afterglow on the stock market. Data showed the biggest one-month decline in job growth in nine years.

"We'll bask in the glow of the employment statistics," said Bill Sullivan, chief money market economist at Morgan Stanley Dean Witter. "There will be some releases that could have a very modest impact. There's an unusually long lull between important market data," he added.

"We're headed for a very quiet week. The market will pay more attention to the poll results after Labor Day and an upcoming OPEC meeting," said Reaser. OPEC meets in Vienna on Sept. 10. Other than that, the market will focus on individual company statements, she said.

"The market is going to resume this debate about whether the economy is slowing too much or enough. The gavel will come down on the side that growth should be enough to support reasonable profit performance."

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