NEW YORK — Wall Street's gains from bullish second-quarter earnings are evaporating quickly in the face of near-record crude oil futures and increasing evidence that high gasoline prices are diverting consumers' dollars.
Because of that, the stock market faces a difficult decision in the week ahead. If investors believe oil will begin to seriously hurt economic growth, then some selling is in order. But if they believe corporate performance is strong enough to overcome energy prices, then holding and bargain-hunting will predominate.
Determining which camp will win depends largely on the price of oil. Crude futures declined for most of the week, though they spiked higher on Friday to settle at $65.35 — shy of the previous week's record, but still quite expensive. The direction of crude futures will likely determine the week's trading.
And unfortunately, nobody is expecting oil to drop as sharply as it has climbed in recent weeks.
Last week, a spike in wholesale and retail prices — blamed on high gasoline and energy costs — shook the markets, with a spate of profit taking Friday blunting the week's losses. The Dow Jones industrial average fell 0.39 percent for the week, the Standard & Poor's 500 index lost 0.87 percent and the Nasdaq composite index dropped 0.99 percent.
A big slate of economic data could help shed light on the state of the economy this week and, indirectly, the effect oil prices have had.
On Wednesday, the Commerce Department will report July's orders for durable goods — big-ticket items designed to last at least three years. Durable goods orders are expected to drop 1.2 percent, compared to June's strong 2.8 percent rise. Since June was unexpectedly high, July's dropoff wouldn't be too surprising. However, if the drop is larger than expected, that may be due to consumers putting off big purchases in the face of higher gasoline prices — a big negative for stocks.
The University of Michigan's consumer sentiment index will be another indicator of oil's effect. Surprisingly, economists expect this month's reading to come in at 92.7, on par with the previous report. However, with gasoline prices at record levels and continuing to climb, investors can reasonably expect this report to miss expectations.
The state of the booming real estate market will come into play earlier in the week. On Tuesday, the National Association of Realtors will report on July's existing home sales, which are expected to fall to an annualized rate of 7.25 million, down from 7.33 million in June. And on Wednesday, new home sales data from the Commerce Department is likewise expected to show a slight decline.
With the bulk of second-quarter earnings reports finished, only a handful of companies will report results in the week ahead. But a pair of companies, both reporting Thursday morning, could provide some circumstantial evidence of the economy's resiliency.
With Wal-Mart Stores Inc. last week stating that high gas prices have cut into its customers' spending habits, investors will be looking closely at discount retailer Dollar General Corp.'s results. The company is expected to earn 21 cents per share, up from 19 cents in last year's quarter. Dollar General stock has dropped 17.3 percent from its 52-week high of $22.80 on Feb. 3, closing Friday at $18.85.
Toll Brothers Inc. has fared much better, surging 134 percent from its 52-week low of $20.615 on Oct. 5, 2004, to close Friday at $48.24. The poster child of the housing bubble, which has boasted of huge construction backlogs for its luxury homes, is expected to earn $1.20 per share for the quarter, up sharply from its 65 cents a year ago.
Federal Reserve officials will be speaking out on the economy and central bank policy this week, and their comments can sometimes shake the markets. Chicago Federal Reserve Bank President Michael Moskow will discuss the economy Wednesday night at the Illinois CPA Society's 25th Annual Business & Technology Solutions Show, and his comments could move stocks Thursday.
And Friday during the session, Fed Chairman Alan Greenspan will discuss central banking at an economic symposium in Jackson Hole, Wyo.