Data, earnings loom after painful week
NEW YORK (Reuters) - Getting back on the bull will be no easy task next week, particularly after the meltdown stock investors endured over the past two days.
The Standard & Poor's 500 and Dow Jones industrial average ended trading on Friday at the week's lowest levels, mark the worst one-week percentage drop for the S&P 500 in nearly five years and the gloomiest on the Dow in five months.
As investors ponder their dwindling returns on the year, big events in the week ahead include the government's sometimes unpredictable payrolls report and quarterly earnings from heavy-hitters such as General Motors (GM.N) and Walt Disney Co.(DIS.N).
Rob Sellar, head of North American equities in the Philadelphia office of Aberdeen Asset Management, called this week's rout in U.S. stocks a "necessary sell-off."
He said it would be unusual for stocks to make new highs, as they recently did, and then go on for another 5 or 10 percent.
"You need a bit of a sell-off to clear the air a little," he said. Now, he expects stocks to consolidate around the lower levels reached on Friday.
Investors will be trying to gauge whether the sell-off has left stocks at an attractive level. The S&P's price-to-earnings ratio of 15.3 on a forward basis put stocks at their cheapest level since early April.
At the same time, based on the S&P's earnings yield of 6.5 percent, stocks present a return that is 1.8 percentage points above the benchmark U.S. Treasury 10-year note yielding 4.77 percent.
While some may make the case that valuations are now more reasonable, others are not so sure the worst is over.
"This market has looked weak in the past and it's rallied back," said Peter Schiff, president of Euro Pacific Capital Inc., a broker-dealer in Darien, Connecticut. "People have been lulled into a false sense of confidence that you can buy these dips."
The Dow Jones industrial average .DJI finished the week down 4.2 percent, the Standard & Poor's 500 Index .SPX dropped 4.9 percent and the Nasdaq Composite Index .IXIC declined 4.7 percent.
Year-to-date, the Dow is up 6.4 percent, while the S&P 500 is up 2.9 percent and the Nasdaq is up 6.1 percent.
The culprits for the turnabout from all-time highs to sell-off are many, including a deteriorating housing sector tied to excesses in subprime lending, where borrowers with poor credit were able to get mortgages.
Also, credit spreads, the yield premium over Treasury issues, have gone from unusually small to much wider.
That in turn was blamed for a number of buyouts by private equity firms getting shelved. Continued...
