Sunday, February 29, 2004

Weekly Market Outlook

The major U.S. indices should rise modestly this week on a spate of economic reports and more earnings announcements from key consumer-related stocks. Personal Spending/Income, ISM Manufacturing/Prices Paid, ISM non-manufacturing, Productivity, Factory Orders and Employment are the major reports scheduled for release. Hovnanian(HOV), Cablevision(CVC), B.J.'s Wholesale Club(BJ), Chico's FAS(CHS), Costco(COST), Saks Fifth Avenue(SKS) and Staples(SPLS) are some of the key stocks that report earnings this week.

The reports with the greatest probability of moving the markets this week are the ISM, Productivity and Employment releases. Economists are projecting that the economy added 125K jobs in February, more than in any month since 2000. As well, the ISM factory index for February is projected to register a very strong 62 on the heels of a 63.6 reading in January, the highest level since 1983. Finally, the revised Productivity reading for the 4th quarter is expected to have risen 2.7%.

BOTTOM LINE: Lower-than-expected readings from the ISM and Employment reports could pressure the market modestly. However, this would also result in a breakdown in interest rates to a new lower trading range. I expect both readings to come in about as expected. I believe we will see a break-out employment report in the near future, but likely not this month. The final reading on 4th quarter Productivity will likely come in as expected, since this is a revised number. At this stage in the recovery, it is good to see productivity falling. It increases the likelihood for future employment growth. Overall, I expect next week's numbers to confirm the recent positive comments from Greenspan, strong consumer spending reports and strength in corporate spending, within the context of a low-interest rate environment. However, if I am wrong about the timing of the employment break-out coming later in the year and Friday's report were to show much greater-than-expected labor growth, a significant sell-off in the bond market would likely occur which could potentially pressure stocks in the short-run.

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