Have stocks stabilized, or is there pain to come?
With the Federal Reserve's interest rate meeting this week and second-quarter earnings still pouring in, investors are trying to decide whether the stock market is at a turning point, or just another plateau before the next big selloff.
The market was volatile last week. Investors were relieved to see some decent earnings, as well as moves by Ambac Financial Group Inc. and Merrill Lynch & Co. to rid their balance sheets of risky debt. But they were disappointed about sluggish gross domestic product growth in the second quarter, and a rise in unemployment to 5.7 percent last month.
The Dow Jones industrial average, after logging several triple-digit, back-and-forth swings, finished the week down 0.39 percent. The Standard & Poor's 500 index ended up 0.21 percent, and the Nasdaq composite index finished up 0.02 percent.
The Fed meets Tuesday, and policymakers are expected to keep interest rates steady at 2 percent, given the recent underwhelming readings on the economy. Inflation rose sharply for businesses in June as they paid higher prices for commodities, but it appears to have eased in July as the price of oil retreated in the second half of the month.
Still, few market participants expect the Fed to get too complacent about inflation; there is no guarantee that commodities costs will keep going down, particularly if the economy stabilizes.
"I think every Fed official would be likely to conclude that inflation pressures would be in danger of rebounding if the economy started to come back," said Stuart Schweitzer, global markets strategist at JPMorgan Private Bank.
Although financial stocks have been rebounding lately — the S&P 500 financial sector index is up 6.4 percent over the past month, outpacing the rest of the market — worries about the banks, brokerages and insurers remain. Merrill Lynch and Ambac did sell off much of their distressed debt, but at huge losses.
"The amount of cleanup left to do likely depends on house prices," Schweitzer said. "I think it's premature to conclude that the worst is over for the housing market."
Falling home prices, along with the tight credit markets, affect banks because many of their assets are securities tied to mortgage payments. Some borrowers are walking away from their mortgages because their home prices are falling below the amount that they owe. Other borrowers are unable to pay because of rising adjustable mortgage rates and other economic factors.
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