With Wall Street still digesting the latest round of sub-par economic data even as it braces for potentially more, economists and analysts said investors can look forward to one 'certainty' in the weeks ahead -- market volatility, as the financial community gauges the U.S economy's probable economic path for 2008.
Market bears will cite the housing sector's recession, related mortgage and asset-backed defaults, slumping corporate earnings and consumer spending, high energy prices, and uncertain job growth as reasons the Dow and the broader markets are likely to continue to fall in the weeks ahead.
Market bulls will cite solid corporate earnings from companies in international markets, relatively low inflation, a declining trade deficit, the fair or undervalued price of some U.S. equities, and the U.S economy's ability to adapt as reasons the markets may reverse their slide in early 2008 and head higher.
The Dow has fallen 14.6% from its October 9, 2007 record close of 14,164.53, and is less than 100 points away from falling below the 12,000 mark, which it first passed in October 2006. The recent fall qualifies as a market correction, from a technical standpoint, which is a drop of 10% or more. If the Dow drops another 800 points or so, to 11,330, it would qualify as a bear market, a drop of 20% or more.
GDP, employment data: Tone setters
Economist Steve Affinito said that with corporate earnings generally expected to under-perform in the Q4 reporting season, two data points scheduled to be released in the next two weeks will go a long way toward setting the market's tone: Q4 GDP growth to be released on Wednesday, January 30, and January 2008 job creation, to be released on Friday, February 1.
Affinito expects Q4 GDP of 3.0-3.6%. Anything below that undoubtedly will not be received warmly by the markets, he said.
"Most economists and analysts believe Q4 will be the last quarter before we really begin to see the impact of the housing slowdown on U.S. GDP, so a figure below 3% would indicate that the slowdown is spreading faster or is more pronounced," Affinito said. "Economists will also be watching the overall impact of oil prices on the economy. If it's extensive, that may signal to traders that oil-induced inflation is rising, which is not good for the equity markets."
After the GDP stat, all eyes will fixed on the January 2008 job report, Affinito said. He said the January 2008 report takes on added importance, due to December 2007's poor report, when the U.S. economy added only 18,000 jobs.
While cautioning that the monthly job statistic is subject to substantial revisions -- the first statistic released is only a rough gauge of the employment situation for the previous month -- Affinito said a large January 2008 under-performance would telegraph to the markets that hiring has slowed to a crawl or ceased. Either would indicate a likely recession in 2008.
Affinito said he expects a 40,000-70,000 job gain in January 2008. "The markets need to be reassured that the U.S. economy is still creating a modest amount of jobs," Affinito said. "Two really bad monthly jobs reports would probably tip those investors on the fence in the direction of 'recession likely' which almost always means more selling of equities, and a decidedly bearish tone on Wall Street."
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