US Investors will return from holiday with same fears

Tuesday, May 27, 2008
The three-day weekend probably didn't bring much relaxation to investors if they stopped at a gas station on the way to the beach or a barbeque. With the average roadside price of gasoline pushing $3.88 a gallon — and going for well over $4 at filling stations in some parts of the country — energy prices have become a prime worry in the stock market.

That's not to say other concerns have dissipated. As Wall Street heads into this shortened week, it remains anxious about the still-slumping housing market, not to mention the ailing financial services sector. But so much of the economy's performance later in the year will depend on energy costs, so the focus will be on crude until investors see a substantial price retreat.

What's particularly troubling about oil's rise is that everyone knows it will affect the economy, but no one is sure exactly how. Experts are split over whether it will cause broad-based inflation, further economic weakness, or both at the same time.

None of these scenarios are good ones. And the fact that the Federal Reserve says its monetary policy will likely remain on hold until it's clear which situation plays out was a big reason the stock market did so poorly last week. The Dow Jones industrial average dropped 3.91%, while the Standard & Poor's 500 index fell 3.47% and the Nasdaq composite index declined 3.33%.

To be sure, expensive oil isn't necessarily destructive in the long term. If the economy holds up, U.S. consumers may be able to gradually adapt their behavior and spending — a trend that could end up actually controlling inflation.

"There are definitely signs that the high price of crude is destroying demand bit by bit," said Craig Peckham, market strategist at Jefferies & Co. "At this point, we're seeing an economy that is experiencing a headwind from the high price of crude, which at the end of the day could act as a natural regulator of the economy."

But among stock investors right now, "inflation fears have been trumping relatively benign growth numbers," he said.

This four-day week will bring a variety of economic readings on the housing market, consumer spending, business spending, and manufacturing.

On Tuesday, the Commerce Department releases its April data on new home sales, expected to show a decline from March sales, according to economists surveyed Friday by Thomson Financial/IFR. Also Tuesday, the Conference Board's consumer confidence index for May is anticipated to edge lower, too.

Wednesday, the Commerce Department reports on orders for durable goods, which are essentially big-ticket items ranging from cars to refrigerators to computers. April's durable goods orders are expected to have dipped by 1.1% after rising by 0.1% in March.

Then Friday, on top of data from Chicago purchasing managers on manufacturing and from the University of Michigan on consumer sentiment, the Commerce Department will report on personal spending. Economists predict spending rose 0.2% in April, compared with a 0.4% increase the previous month.

That report will include the closely watched personal consumption expenditures deflator, which is a measure of inflation at the personal level. Economists, on average, expect that it was steady in April at an annual rate of 2.2%.

Investors should get an additional sense of how consumers are spending their money in earnings reports this week from Borders Group Inc., Costco Wholesale Corp., Dell Inc., Sears Holdings Corp. and Tiffany & Co. (AP Business)