Recovery and debt woes to trail US stock market

US stocks face more turbulence that could send indices spiralling through key levels this week as doubts about the pace of the global recovery persist and fears over Europe's sovereign debt woes rattle sentiment.

Investors worry that the debt problems will hinder efforts to sustain the nascent economic recovery and undermine confidence in the stability of governments that stand behind the euro.

With the Dow briefly dipping back below 10,000 and the benchmark S&P 500 down 7.3 per cent from its 15-month closing peak of January 19, money managers and analysts say there is a growing sense that the US stock market's rally from the lows of March 2009 has all but run its course.

"I am in a camp that believes we're in a correction. The mood has turned short-term negative," said Eric Kuby, Chief Investment Officer at NorthStar Investment Management in Chicago. "The general trend for more than nine months has been for the market to rally, but now it seems as if the enthusiasm has abated, and it's hard for the market to move forward."

Investors had bet the start of 2010 would show that the recovery was gaining momentum, but their optimism has been met with more signs of turbulence in the labour market and worry over possible contagion from fiscal upheaval in Greece, Portugal and Spain.

As a result, the euro has fallen sharply against the US dollar due to risk aversion, hurting stocks and the prices of global commodities. On Friday, the benchmark S&P 500 capped its fourth straight weekly decline, falling 0.7 per cent. The Dow dropped 0.6 per cent and the Nasdaq shed 0.3 per cent.

"The markets are not taking any prisoners. They're not looking at things as isolated incidents. They're looking at this as the spreading of a contagion," said John Praveen, Chief Investment Strategist at Prudential International Investments Advisers in Newark, New Jersey.

"It's not clear at this point whether this will stop at Europe or whether the correction has run its course."

Uncertainty surrounding the Obama administration's legislative reform agenda for the banking and healthcare sectors added to the bearishness, along with uneasiness about the United States' own ballooning fiscal deficit.

There are also signs that China is looking to curb lending to prevent its economy from overheating, which risks derailing the global recovery if stimulus was withdrawn too soon.

The US government's January non-farm payrolls report sowed even more caution on Friday as it showed the economy unexpectedly lost 20,000 jobs in January.

All told, the correction was long anticipated, but there is uncertainty about how far it will go. The technical damage from the latest correction briefly drove the Dow below 10,000 on Thursday and Friday, but the index has yet to close under that level.

Meanwhile, the S&P 500 has broken through key support at 1,085 and slid as low as 1,044.50 on Friday before rebounding slightly towards the close.

Market technicians have warned that further downside could take the S&P 500 as low as 1,036 – a level that will signify the "textbook" 10 per cent correction from the January 19 closing peak.

But if the previous pullbacks – in July and in October 2009 – are any indication, investors could again look for opportunities in the days ahead to scour the market for stocks whose prices have been pushed down to attractive levels. Late on Friday, there was some evidence of investors snapping up beaten-down shares as technology and materials sectors led a last-minute bounce.

The highlight on the economic calendar is set to be the Commerce Department's January retail sales report on Thursday, along with December business inventories and weekly jobless claims. That trio of reports will follow the release on Wednesday of the US international trade deficit for December. On The Reuters/University of Michigan survey of consumer sentiment's preliminary February reading is due on Friday.

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