After being taken on a roller-coaster ride this summer, market-watchers are looking for stocks in the coming week to provide a strong start to the fourth quarter. "Now that September and the third quarter are coming to a close, investors are wondering if they can breathe a sigh of relief and utter good riddance," says Sam Stovall, chief investment strategist at Standard & Poor's. "Well, if history is any guide, they most certainly can." According to Stovall, the S&P 500's average gain of 2.8% in October has been superior to any other month of the year since 1990. And the S&P has risen by an average of 6.8% in the fourth quarter over the same span. Stovall also does not expect Hurricane Katrina to weigh too heavily on earnings in the coming month. According to his forecasts, operating earnings growth for the S&P should continue to advance at double-digit rates for the third quarter, full year 2005 and all of 2006. "An expected snap back from what we view as the market's negative overreaction to the hurricanes' effect on consumer sentiment and corporate earnings -- similar to consumers' and investors' reactions following the 9/11 attacks -- will prove
it to be overstated, in our opinion," says Stovall. "And the U.S. equity markets will work their way higher during this fourth quarter."
What Hath Katrina Wrought?The market will start to see Katrina's impact on the consumer starting on Monday, with auto and truck sales for September, along with construction spending, which is expected to jump 0.4% after being flat in August. September's ISM index also arrives Monday. Economists are expecting a decline to 52 from 53.6 in August. "Stock traders will be relieved as long as it stays above 50," says Wachovia economist John Silvia. "But the bond market will be disappointed because it means the Fed will keep going." A reading below 50 indicates contraction in manufacturing activity.
Economists also expect a dip to 59 from 65 in August when the ISM services data are released, on Wednesday. Friday's nonfarm payrolls number will be the main event, however, especially in light of Hurricane Katrina. "We've heard a lot of noise, but the market wants to see how much Katrina really impacted the economy in September," says Paul Mendelsohn, strategist at Windham Financial. "If employment starts to deteriorate in earnest, then the Fed may start to rethink its plans." Economists are expecting a loss of 172,000 jobs for the month, compared with a gain of 169,000 in August. The consensus estimate for the unemployment rate is 5.1%, up from 4.9% the prior month.