Investors nervous of second half

US stocks will start the second half of 2008 staring into the jaws of a bear market.

At Friday's closing bell, it looked like there was little relief in sight from runaway oil prices and the lack of reassurances from bank about their gloomy outlooks.

Investors will face a blitz of economic data in the holiday-shortened week, with the marquee number coming in Thursday's payrolls report for June.

Recession fears are rising with crude oil's dizzying spiral to a succession of record highs and the relentless stream of forecasts for more bank write-downs.

When the second quarter ends tomorrow, the US market may finish June with its worst monthly percentage decline since September 2002. "The combination of a banking system that is on its knees and high commodity prices is just making investors nervous," said Ray Rund, managing director and head of research at Shaker Investments in Cleveland, Ohio. "Even though we are not technically in a recession, it certainly feels that way."

US oil futures shot up to a record high just a penny shy of $143 a barrel on Friday – wrapping up a week when the president of Opec predicted that oil prices could rise as high as $170 in the coming months. Gold hit a one-month high.

The Dow Jones industrial average finished the week down 4.2 per cent, while the Standard and Poor's 500 Index slid three per cent, and the Nasdaq Composite Index dropped 3.8 per cent. It was the worst week for the Dow and the Nasdaq since February 10. The outlook for the US job market is grim, based on forecasts for Thursday's payrolls report. Economists polled by Reuters expect a loss of 60,000 jobs in June, compared with a decline of 49,000 in May.

The US unemployment rate, however, is predicted at 5.4 per cent, a slight improvement from May's 5.5 per cent, which was the highest since October 2004.

Thursday's data will include the Institute for Supply Management's June reading on the vast services sector – a day before the market closes for the Independence Day holiday on Friday. The ISM service-sector index is pegged at 51.0 in June, compared with 51.7 in May, the Reuters poll showed.

On Tuesday, two reports will get scrutiny: the ISM's June index on the US manufacturing sector and US car sales. The ISM manufacturing index is forecast at 48.6 in June, down from May's 49.6, with a reading under 50.0 signaling contraction, the Reuters poll showed. Petrol prices at $4 a gallon are slashing the demand for petrol-guzzling sport utility vehicles. This week, the stock of Dow component General Motors Corporation plummeted to a 53-year low after Goldman Sachs cut its rating on GM to "sell" and warned it would have to raise capital.

But the market is eager to see that the impact of the credit crisis on banks is abating before there can be any meaningful rebound in stocks. "My personal opinion is that we could test 11,100 on the Dow in the next couple of days," said Victor Pugliese, director of listed equity trading at Broadpoint Securities in San Francisco.

"I think the market still trends down and if we can hold at the 11,000 or 11,100 mark, somewhere in there, there is a chance we can get a bear market rally for a few days." During Friday's session, the Dow briefly tipped below the threshold that market technicians define as a bear market, falling more than 20 per cent from its record closing high set last October.

A bear market is marked by a prolonged period of falling stock prices. It is not considered official unless there is a market close of 20 percent below the most recent closing high.

The Dow Jones industrial average hit its lowest daily close in 21 months on Friday – less than 15 points away from ending 20 per cent below its record finish on October 9, 2007.

"Considering that the Dow is at its lowest since 2006, the question is whether the S&P, Nasdaq and the Russell 2000 will follow the Dow in breaking March and January lows," said Peter Boockvar, equity strategist at Miller Tabak and Company in New York.

Notable earnings reports next week among S&P 500 companies will come from tax preparer H&R Block Inc tomorrow, for-profit education company Apollo Group Inc on Tuesday and super-discounter Family Dollar Stores Inc on Wednesday.

Also set to command attention next week are speeches on the economy by two key Fed officials: Federal Reserve Bank of Atlanta President Dennis Lockhart is scheduled to give brief remarks at an event on Tuesday evening in Washington, DC, while Federal Reserve Board Governor Frederic Mishkin speaks on Wednesday in Israel.

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