Stocks Look to Shake Fears of Global Slowdown in Coming Week

NEW YORK ( TheStreet) -- Fears of a slowdown in global growth helped spur a pullback in stocks for much of this week. However, by Friday, a positive finish inspired confidence that equities will find more room to run in the coming week.

It's not that analysts didn't know that growth in China is slowing and that Europe stands in danger of a recession. It's just that investors may be at fault for making too much out of whatever data points are most recent -- reads on manufacturing in China and the eurozone disappointed the past week; cautionary notes on the global economy were issued by FedEx while warnings of falling Chinese demand came from BHP Billiton. All of which got the market a bit spooked. Not to mention that domestic housing data didn't help the bleeding.

The S&P 500 and Dow Jones Industrial Average both saw their worst weeks so far this year, with the former losing 0.5% and the latter down 1.2%. Global players on the Dow Jones Industrial Average helped push the index down three straight days before a Friday rebound. The Nasdaq fared the best out, finishing the week up 0.4% after hitting an 11-year high.

Among the things investors will watch the coming week is the continued rise in oil prices. Investors got another scare on Friday when crude prices briefly spiked on news of a drop in exports from Iran. President Obama said earlier in the day that tensions in the Middle East could tack on a $20 to $30 premium a barrel of oil. Any further signs of weakening demand from China could pressure oil prices, however, as they did this past Thursday when the country issued a weaker than expected purchasing managers' survey.

As for the broader market, a breakdown of component performances on the S&P 500 offers some clues as to what's ahead. While the S&P 500 is near bull market highs, only 76% of stocks on the index are trading above their 50-day moving averages, according to Bespoke Investment Group.

"Breadth hasn't nearly gotten up to the levels it normally gets to when the market has been as overbought as it is now in the past... readings in the 90s have been common throughout this bull market, but the high we've seen in 2012 as the market has surged has been 87%," said Bespoke.

The conclusion from this observation depends if you're a glass half full or half empty person. "Bulls can make a case that weak breadth means there's more room to run for this rally, but bears probably have the upper hand with the argument that this rally has seen less stock participation than normal," writes Bespoke.

In a more firmly bullish signal, however, equities are outperforming bonds for the second straight quarter. Circumstances like this in the past, Bespoke says, have been followed by a positive return averaging 4.55% in equities but a decline of 0.5% in fixed income, in the following quarter. In other words, the three months of April through June could see "some nasty outflows" for bond funds.

A bearish signal comes from the Dow Jones Transportation Average, which many analysts regard as a forward indicator for the broader market. The group showed weakness toward the end of the week, pulled down by losses in FedEx's stock.

"The Transportation Average just touched its prior bull market high this past Monday, but the index quickly pulled back and is now trading back below its 50-day moving average," notes Bespoke Investment Group. The index lost 2.5% in total this week.

Depite this, the consensus amongst investors still seems to point to what Wall Street calls "risk on." Market analysts at Barclays put out their Global Outlook report this past week, saying that investors should not reduce their exposure to equities as they don't expect a major correction in the market.

"We recommend that investors reposition portfolios away from areas that have benefitted most from the reduction in tail risks and where valuations seem stretched, and toward assets that will benefit from strong U.S.-led global growth and high energy prices," writes Larry Kantor, head of research with the firm.

Companies reporting earnings next week include Apollo Group ( APOL) on Monday; McCormick ( MKC), Walgreen ( WAG) and Lennar ( LEN) on Tuesday, Mosaic ( MOS), Family Dollar Stores ( FDO) and Red Hat ( RHT) on Wednesday, Best Buy ( BBY) on Thursday and Finish Line ( FINL) on Friday.

Investors get a fairly loaded economic calendar next week as well, with reports from several regional Federal Reserve branches. Both the Chicago Federal Reserve's national activity index and the Dallas Federal Reserve's manufacturing survey are due out on Monday.

More is expected on the housing front on Monday, with pending home sales from the National Association of Realtors expected to rise 1% for February, after a 2% gain in January. Estimates on economic numbers are based on polls by Thomson Reuters.

On Tuesday, S&P Case-Shiller will likely report that home prices inched higher by 0.2% during January, making for a drop of 3.7% compared to the same time last year. The reading in January dropped 4% compared to the same time last year.

The Conference Board's consumer confidence index on Tuesday is expected to read at 70.4 in March, slightly lower than 70.8 in February. The last time consumer confidence levels were this high was in February of last year.

Durable goods orders are expected to have risen 2.9% in February, according to a Commerce Department report out on Wednesday. January saw a 3.7% drop in orders, the fastest pace in three years.

Thursday brings data on weekly jobless claims, which have dropped to a four-year low. The latest week ended March 18 probably saw 350,000 claims.

The same day, the government announces its third read on economic growth in the fourth quarter of 2011. No surprises expected there. The estimate is expected to stay put from the government's latest read of a 3% growth pace. Again, this is up from 1.8% annualized growth rate in the third quarter but still worrisome, especially given that growth is expected to pull back going into the first quarter of 2012.

On Friday, the Commerce Department's read on personal incomes probably rose 0.4% in February, adding to a 0.3% rise in January. Consumption is expected to rise 0.6% in February adding to a 0.2% in the prior month.

The Chicago Fed's purchasing managers index is expected to come in at 63.4 in March, down from the previous month's read of 64.

The last day of the week sees another read on the consumer front, this time from the University of Michigan's consumer sentiment survey, which is forecast to read at 74.9 in March, a touch higher than 74.3 in February. The last report suggested that Americans were getting worried about higher inflation even though they didn't expect the run up in gas prices to last long, so economists will be watching for confirmation or otherwise of this sentiment.

In terms of the domestic economic picture, data points, mostly notably in the jobs market, continue to improve. Even the housing market has shown signs of stabilization. Analysts at J.P. Morgan wrote in their global outlook report this week that in the short term, the U.S. economy will help lead markets higher. After all, the story at home looks much better compared to what's going on overseas.

However, worth noting is growing chatter that the U.S. economy may never return to what economists have deemed "normal" for the last century. Recent academic research from Harvard and Princeton University suggests that the U.S. may not ever completely recover from the latest recession.

A report published mid-March, titled "Disentangling the Channels of the 2007-2009 Recession," says that a long term slowdown in growth trends may be to blame for the current slow recovery.

"Because the net change in mean productivity growth over this period is small, this slower trend growth in employment corresponds directly to slowdown in trend GDP growth... jobless recoveries will be the norm," the authors write.

-- Written by Chao Deng in New York.

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