Wall Street heads into another turbulent week with investors set to pore over a government report on retail sales and earnings from Wal-Mart Stores Inc. to get a better reading on the consumer.
There are growing signs that the deepening economic slowdown has caused Americans to tighten their purse strings.
There was fresh evidence of this past week when retailers posted the worst October same-store sales in 35 years - and analysts believe the upcoming holiday shopping season could be among the slowest in decades.
With consumer spending driving more than two-thirds of the US economy, investors will be paying close attention to earnings outlooks for some of the nation's biggest retailers. Wal-Mart, the nation's biggest retail chain, will post results on Thursday. Kohl's Corp., JCPenny Co., Macy's Inc., and Abercrombie & Fitch Co. are scheduled to release reports as well.
Investors will get an overall picture of consumer spending on Friday when the Commerce Department releases its October retail sales index. The closely-watched gauge is expected to show sales dropping 1.2 percent for the month after falling 1.2 percent in September. Excluding the battered automobile industry, sales are expected to have fallen 0.9 percent.
The market, still trying to recover from October's devastating losses, will likely zigzag as investors react to these reports. This has been the pattern during the past few weeks, with major indexes swinging from one extreme to another in capricious trading.
Many analysts believe this volatility is part of a bottoming-out process. The real test is to see in the coming days if investors have already priced in the potential for negative news or if fear of a protracted recession will trigger another stream of selling.
"The news is going to be really bad, and that shouldn't be a surprise to investors," said Peter Cohan, principal of Peter S. Cohan & Associates. "But, I'm feeling uncomfortable that the market is a daily mood ring for the economy. The small investors are largely out of the market, and what you end up with is a small number of very large players making decisions."
Cohan pins the volatility on hedge funds, pension funds, and big university endowments unloading stocks to raise collateral and scooping up undervalued stocks to seize opportunity. He believes this will eventually result in a more stable trading environment that will lure retail investors back, and add stability to major indexes.
Hedge funds could come to centre stage this week if they receive another wave of redemption requests from investors.
The upcoming Nov. 15 deadline for redemptions could cause further instability in the market, Cohan said.
Stocks enjoyed the biggest Election Day rally in history last Tuesday, but couldn't maintain the big gains amid further uncertainty about the economy. For the week, the Dow Jones industrial average and broader benchmarks such as the Standard & Poor's 500 index lost about 4 percent after surging 10 percent or more the week before.
There are a number of other reports on tap that might give more insight into the economy. On Thursday, Wall Street gets readings on the labour market and trade deficit, followed by a look at consumer sentiment on Friday. Trading on Tuesday could be more subdued with the bond market and some banks closed due to Veterans Day.
Additionally, investors are watching for developments with General Motors Corp., Chrysler and Ford Motor Co. after the automakers met with Congressional leaders last week to secure financial help.
Democratic leaders in Congress asked the Bush administration on Saturday to provide more aid to the struggling auto industry, which is bleeding cash and jobs as sales have dropped to their lowest level in a quarter-century. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid said in a letter to Treasury Secretary Henry Paulson that the administration should consider expanding the US$700 billion bailout to include car companies.
"We must safeguard the interests of American taxpayers, protect the hundreds of thousands of automobile workers and retirees, stop the erosion of our manufacturing base, and bolster our economy," Pelosi, D-Calif., and Reid, D-Nev., wrote.
Even more news might be generated out of Washington with the possible selection of a new Treasury secretary by President-elect Barack Obama. He has already identified that the economy is the new administration's biggest priority, and a Treasury pick could lift stocks.
Among those being considered for the post include former Treasury Secretary Lawrence Summers, Federal Reserve Bank of New York President Timothy Geithner, and former Federal Reserve Chairman Paul Volcker.