What a Week: Stocks Drift Up as Oil Plunges

Crude's 8% decline aids shares, but volume is paltry and economic data decidedly mixed.
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You couldn't quite hear a pin drop on Wall Street this week, but almost. Trading on Friday was the lightest of the year eclipsing the previous year-low set on Thursday.

With summer vacation season in high gear, there weren't many investors around to party as oil prices, the scourge of the market for the past few months, posted an almost 8% decline to end the week at $43.18 a barrel on the New York Mercantile Exchange.

Oil's decline helped the major indices achieve modest gains for the third consecutive week. The

S&P 500

gained 0.9% to 1107.77, the

Dow Jones Industrial Average

moved up 0.8% to 10,195.01, and the

Nasdaq Composite

rose 1.3% to 1862.09.

Among the biggest gainers for the week were chemical companies that use oil for production and industrial players.

Wellman

(WLM)

gained 8%,

Lyondell Chemical

(LYO)

rose 7% and

Dow Chemical

(DOW) - Get Report

gained 6%.

Caterpillar

(CAT) - Get Report

gained 3% and

AGCO

(AG) - Get Report

rose 4%.

It was a tough week for

Starbucks

(SBUX) - Get Report

, however, which dropped almost 7% Thursday after reporting that same-store sales for June rose a less-than-expected 8% vs. at least 10% reported for every month previously this year. It's a bit of a puzzle how the Starbucks news could disappoint because the cafe operator has been warning all year that same-store sales were slowing. For the week, Starbucks shares lost 5% to $42.57.

The 'Big Mo'

The market's overall upward trend may become stronger next month, according to research by Credit Suisse First Boston that studied equity performance in the month after the past 18 Republican conventions. As members of the GOP head to New York next week to renominate President Bush, investors may be pleased to hear that the S&P 500 performed 1.2% better than the average monthly performance over the 68 years of the study. The phenomenon was even greater, 2.1%, when a Republican incumbent was getting the nod, the study found.

The market has tilted in favor of Bush, gaining when his prospects improved and flailing along with the president at times. As colleague

Rebecca Byrne wrote on Friday, a successful convention that puts some of the "Big Mo," as his father called it, behind the younger Bush's campaign could help bolster the markets as well.

On the economic front, the news was evolutionary rather than revolutionary, capped off by Friday's downward revision of second-quarter gross domestic product to 2.8% from the 3% previously reported. Ho hum. The stock market appeared to take some solace from the fact that the revision wasn't any worse.

There also was further evidence that consumer demand is slowing. Sales at chain stores crawled up just 0.1% for the week ended Aug. 21 and sales of both new and existing homes dropped more than expected in July.

Durable goods orders for July looked healthy, with a 1.7% gain. But after removing a volatile blip in aircraft orders, the report showed a less-robust 0.1% gain.

With prices for a whole host of commodities and services ticking up, not just oil, the economy's less-than-stellar performance of late has some talking about stagflation, the dreaded combination of rising prices and falling output that struck the country in the 1970s.

"An oil price shock is a tax hike with stagflationary consequences," Pimco fund manager Paul McCulley wrote on the firm's Web site Friday. "Nasty stuff."

It's been argued that the rise in crude prices this time around, about 37% over the past year, doesn't qualify as enough of a shock to tank the economy because, adjusted for inflation, prices still are below the $80 a barrel (in today's dollars) that they hit in the 1970s. McCulley disagreed.

"It is probably true that being hit over the head with a 16-inch baseball bat is less painful than being hit over the head with a 32-inch baseball bat," he quipped. "But only a fool would argue that taking a hit from a baseball bat is not a negative shock."

Nothing happened this week to change the market's view that another 0.25% point hike in the federal funds rate is coming at the

Federal Reserve's

Sept. 21 meeting. Futures contracts are still indicating about an 80% chance of a September move and an almost certain second hike before year-end, leaving the benchmark rate at 2% percent by Dec. 31.

That consensus could be smashed to bits a week from now. Next Friday, the Labor Department releases its August payrolls report. The results last month, that a shockingly low 32,000 total jobs were added in July, sent the markets batty. The consensus forecast for the August report is a gain of 125,000.

Asha Bangalore, an economist with Northern Trust in Chicago, sees continued labor market weakness in the filings for unemployment insurance that came out this week. The average number of weekly claims filed in August has been 337,000, unchanged from July. Claims are lower than a year ago but the rate of improvement has stalled, which raises more questions "about the strength of the underlying fundamentals," he wrote Thursday.

Short-Term Gain, Long-Term Pain

Fed Chairman Alan Greenspan was in Jackson Hole, Wyo., on Friday but he wasn't addressing the short-term economic outlook. In the long run, as John Maynard Keynes once said, we're all dead. Well, maybe not soon enough, according to Greenspan.

In Friday's speech, Greenspan issued a stark call for Congress and the president to address the looming crisis in Social Security and Medicare programs brought on by the aging of the U.S. population. Benefit cuts or a later retirement age might be the solution, hinted the chairman, who ran the 1983 Social Security overhaul effort.

The proportion of the U.S. population over 65 will almost double to 20% by 2035, as members of the baby boom generation reach the retirement age. That will drop the ratio of current workers paying for benefits to retirees collecting benefits from 3 to 1 to 2 to 1. Back in 1960, the ratio was 5 to 1.

Greenspan's message was largely the same one he delivered on Capitol Hill back in February. While Congress typically defers to the chairman on economic matters, his call to curb benefits at that time put him in direct contact with the "third rail" American politics and legislators on both sides of the aisle were quick to criticize.

Apparently the arrows bounced off the chairman's thick skin. "If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs," Greenspan said. "If we delay, the adjustments could be abrupt and painful."

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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