Can stocks rise if the global economy stalls?

The Federal Reserve is coordinating with central banks in Europe to cut the cost of borrowing dollars and ease the strain on European financial markets. Anthony Mason reports on how long the fix will last.

(MoneyWatch) Stocks have dropped about 2.5 percent since the recent highs reached on Sept. 14, the day after a third round of quantitative easing (QE3) was announced. Since then, gloomy economic forecasts from the World Bank and the International Monetary Fund (IMF), in addition to warnings from corporate America that margins are shrinking, have put investors on the defensive.

There are a few more negatives to add to the mix: Company insiders are selling their shares; volatility has dropped to its lowest level since the financial crisis, indicating complacency; and with just 53 trading sessions left in 2012, some investors could be content to lock in double-digit gains at 15 percent capital gains rates.

On the other hand, the American Association of Individual Investors (AAII) survey found that 38.8 percent of investors say they expect the market to fall during the next six months, up 5.6 percent from the previous week and just 30.6 percent expect stocks will rise, the lowest since Aug. 2. True to those feelings, over the past 15 months, investors have yanked $213 billion from stock funds and added $292 billion to bond funds. These data points are usually interpreted to be contra-indicators: When retail investors turn bearish, it can mean that the next upswing is around the corner.

As earnings season continues this week, a slew of reports may give investors more information to judge whether the bullish or bearish case makes more sense. When the IMF cut its 2012 and 2013 growth projections, it cited China as a particular concern. On Thursday, China will release what are likely to be soft Q3 GDP, retail sales and industrial production numbers.

In the U.S., it will be interesting to see whether improving consumer sentiment (the Thomson Reuters/University of Michigan sentiment index is currently at 5-year highs) translates into better than expected retail sales. This week will also see a number of housing reports, which are expected to show that the recovery in real estate continues. If so, not only will housing cease to be a drag on growth, it may even begin to contribute to it.

-- DJIA: 13,328, down 2% on week, up 9.1% on year

-- S&P 500: 1,428, down 2.2% on week, up 13.6% on year (worst weekly performance since June 1)

-- NASDAQ: 3,044, down 3% on week, up 16.8% on year

-- November Crude Oil: $92.28, up 2.2% on week

-- December Gold: $1,759.70, down 1.1% on week

-- AAA National Average Price for Gallon of Regular Gas: $3.80

THE WEEK AHEAD:

Mon 10/15:

Citigroup

8:30 Retail Sales

8:30 Empire State Mfg Survey

10:00 Business Inventories

Tues 10/16:

Coca Cola, Goldman Sachs, Intel, IBM, J&J

8:30 Consumer Price Index

9:15 Industrial Production

10:00 Housing Market Index

Social Security Administration releases annual cost of living adjustment

Presidential Debate at Hofstra

Weds 10/17:

Abbott Labs, AMEX, AMR Group, Bank of America, eBay, PepsiCo

7:00 MBA mortgage purchase applications index

8:30 Housing Starts

Thurs 10/18:

Capital One, ETrade, Google, Microsoft, Morgan Stanley, Philip Morris, Verizon

EU leaders meet

China GDP, retail sales and industrial production

8:30 Weekly jobless claims

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 10/19:

GE, McDonald's, Schlumberger

10:00 Existing Home Sales

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    Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.

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