Rising Market to Be Tested by Economic Reports

This week may determine the sustainability of a recent shift from U.S. energy stocks to non-cyclical sectors when payroll data and other key economic indicators will be released amid a heavy stream of earnings reports.

The trend toward bigger-cap technology, health-care and consumer stocks that helped the Dow break through its all-time record and the 12,000 mark was briefly interrupted last week as energy and material stocks hopped back into the lead. But Friday's weaker-than-expected data on gross domestic product suggests stocks that are less sensitive to growth will be the ones poised to lead.

Besides all the data, 94 of the 500 components of the Standard & Poor's 500 Index will give quarterly profit updates this week.

"We're still in the thick of earnings," said Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco. "We also get the Chicago Purchasing Managers' number and the ISM manufacturing survey. Both of those are pretty important data points so we're going to see some meaningful macro numbers coincide with what we've got as far as corporate earnings."

The Labor Department's nonfarm payrolls report Friday will wrap up a data-packed week, when investors will watch for signs that the economy is still growing at a healthy pace while inflation remains moderate. Economists polled by Reuters believe that payrolls grew by 125,000 jobs in October, compared with a gain of just 51,000 in September. Average hourly earnings are forecast to rise 0.3 percent in October, after an increase of 0.2 percent the previous month.

Investors will start the week with the latest read on inflation Monday, with the release of September personal income and consumption data, and the accompanying price index.

Three other key gauges of economic growth are set for release in the week ahead: The National Association of Purchasing Management-Chicago's index of Midwest business activity on Tuesday; the Institute for Supply Management's manufacturing survey on Wednesday, and the ISM's survey on the services, or non-manufacturing, sector on Friday.

The Conference Board will issue its consumer confidence index Tuesday, with economists expecting an October reading of 108.0, up from 104.5 in September. Domestic car and truck sales for October are due Wednesday, with the Reuters poll forecasting a slower pace.


Of Standard & Poor's 10 major industry groups, energy and materials were the top two performers, while industrials, technology and health care lagged at the bottom, all netting negative returns for the past week.

"The groups that have led the market are oil and oil services. These areas since have corrected around over 10 percent and, in some cases 20 percent, but they've come back very quickly," said Carl Birkelbach, founder and chief executive of Birkelbach Investment Securities in Chicago.

"We're at the point where these need to correct some more," he added. "For the market to make its next move, for the Dow to aim for 14,000, those will have to take a little rest."

Signs of a further slowdown in the economy could force energy and other commodity stocks to take that rest, as decreased business activity would slacken demand for their products. But economic figures will not be the only factor determining prices of commodity-related equities.

The slew of energy and oil-services companies set to report earnings this week include Marathon Oil Corp., Devon Energy Crop., Dominion Resources Inc. and Valero Energy Corp.

U.S. crude oil prices are down 23 percent from a record set in mid-July. On Friday, December crude settled at $60.75 a barrel on the New York Mercantile Exchange.


Utility companies, another safe bet in a slowing economy, are featured prominently on this week's earnings calendar. Those scheduled to give quarterly reports include Entergy Corp. on Tuesday, DTE Energy Co. on Wednesday and Consolidated Edison Inc. on Thursday.

The Dow components set to report results this week are telecommunication services provider Verizon Communications Inc. on Monday, while on Tuesday, earnings are due from consumer goods maker Procter & Gamble Co.


On Friday, stocks finished the session lower. The blue-chip Dow Jones industrial average fell 73.40 points, or 0.60 percent, to end at 12,090.26. The Standard & Poor's 500 Index dropped 11.74 points, or 0.85 percent, to finish at 1,377.34. The Nasdaq Composite Index declined 28.48 points, or 1.20 percent, to close at 2,350.62.

For the past week, though, stocks rose. The Dow gained 0.7 percent, while the S&P 500 added 0.6 percent, and the Nasdaq advanced 0.4 percent.

Data on Friday showed third-quarter U.S. economic growth was the weakest in more than three years, which sent all three major U.S. stock indexes lower.

But it was the smaller-capitalization indexes that suffered the most on Friday. The Russell 2000 index fell 1.3 percent and the Midcap 400 Index fell 1.2 percent.

Smaller-cap U.S. stocks, which tend to be less geographically diversified, usually fare worse when U.S. economic conditions weaken.

"With the GDP number in mind, investors will be looking for what type of growth there will be in the economy," said Richard Sichel, who oversees $1.5 billion as chief investment officer of Philadelphia Trust Co. in Philadelphia.

"The global economy is a very big positive, so the types of U.S. companies investors need to key into are the industrials and other big ones that can continue to participate in strong global growth."