By Nick Godt
With any concerns about the second-quarter earnings season
mostly behind, the market will now key on more signs of "green
shoots" in big economic reports, starting with the second-quarter
GDP on Friday.
"The recent batch of earnings releases has certainly nourished
those green-shoot hopes," says Ken Tower, chief market strategist
at Quantitative Analysis Service.
In fact, part of those bright hopes were already being factored
in the market on Thursday, he said, noting stocks' latest leap to
fresh highs for the year.
On Thursday, the Dow Jones Industrial Average (DJI) gained 83
points, or 1%, to end at 9,154, its highest close since early
November. The broad S&P 500 index (SPX) was up 11 points, or
1.2%, at 986, also its highest since early November. The Nasdaq
Composite (RIXF) rose 16 points, or 1.2%, to 1,984, after earlier
topping the 2,000 mark for the first time since early October.
"Today is the anticipation of the improvement that we're likely
to get in tomorrow's data," Tower said.
Stocks have already rallied 40% since hitting lows in March on
hopes that the worst of the recession is behind. But evidence of
economic improvement has remained anecdotal.
Yet, Friday's report on second-quarter gross domestic production
is widely expected to confirm that the economy is falling at a much
slower pace. The GDP is expected to show the rate of contraction
slowed to 1.2% in the second quarter, compared with a 5.5% slide in
the first quarter, according to the average forecast of economists
surveyed by MarketWatch.
"We're up sharply today, so it would not be surprising if we see
some profit-taking tomorrow," Tower said. "The market is already
anticipating an improvement, so we could even decline as the news
comes out. But over the longer-term, this should put us in good
shape."
Economically sensitive sectors -- such as industrials, energy,
materials, technology and consumer discretionary -- should stand to
gain the most. But Tower noted that the energy and industrials
sectors have already rallied on optimistic outlooks.
According to economists at BMO Capital Markets, who suggest that
the third quarter might also mark the end of the recession, there
are also signs that auto production is "ramping higher" and that
the housing market is starting to stabilize.
Also in anticipation of this, the consumer discretionary sector,
which includes not only retailers -- such as Macy's Inc. (M) and
Best Buy Co Inc. (BBY) -- but also automotive-related stocks such
as Ford Motor Co. (F), Goodyear Tire & Rubber (GT), and
homebuilders -- such as KB Home (KBH) and Lennar Corp. (LEN) -- has
already rallied quite strongly in July.
The sector is already up 16% for July, making it the third best
performer on the S&P 500.
The move took place "even though there's a lot of concern for
debt levels for consumers," said Sam Stovall, chief investment
strategist at Standard & Poor's.
He said there are concerns that may economic sensitive sectors
may have already rallied in anticipation of an earnings and
economic recovery. Stovall therefore recently surveyed S&P
analysts to figure out which sub-sectors have been laggards since
stocks began bouncing back in early July after slumping for several
weeks.
He then selected among those stocks that are rated buy or
stronger by S&P. Among those are the biotechnology sector, and
stocks such as Gilead Sciences (GILD). Among brewers, S&P
suggests Molson Coors (TAP.NV.T); among household products,
Colgate-Palmolive (CL); among soft drinks, Coca Cola (KO), and in
systems software, Sybase (SY).
For the forward-looking animal that is the stock market, much of
the interest from the GDP report will come from what it means for
the economy going forward. Many economists so far are increasingly
positive about the second half of the year.
"The second quarter of 2009 may likely prove to be the final
period of contraction of this recession," said Jerry Webman, chief
economist at Oppenheimer Funds, in a note.
"As we move into the second half of the year, several key
components of GDP, including inventories, business investment and
housing, are likely to revert from extremely negative levels to
neutral or slightly expansionary states," he said.
On Wednesday, stocks took a hit after the Commerce Department
reported a much worse than expected 2.5% drop in orders for
big-ticket items, largely due to the woes of the auto industry as
well as slumping orders for aircraft.
But excluding those sectors, "the June data otherwise revealed a
pattern of upside surprises for orders ex-transportation, shipments
and capital equipment, alongside as-expected inventory data," Mike
Englund, an economist at Action Economics, wrote in a note.
The equipment and software components of the GDP, he said,
should also show there was a slower rate of deceleration last
quarter.