Why the S&P 500 Stock Index May Fall Below 1,000

The S&P 500 stock index may be heading below 1,000
The S&P 500 stock index may be heading below 1,000

The S&P 500 made one sharp move down this year from 1,200 in late April to just about 1,000 in the first week in July. The index may be heading below 1,000 in the next month from the 1,079 where it closed on Aug.13.

The first reason, and perhaps the most important, is that the unemployment rate appears to be rising again. Weekly jobless claims have risen to six-month highs. The August jobs number may show a loss of workers in the private sector, which would push the unemployment level back toward 10%.

July Trade Deficit Could Push Down GDP

The revised second-quarter GDP number could drop well below 2%. The early report on the figure put it at a 2.4% annual growth rate. The July trade deficit was large enough to knock that down by a percentage point, and perhaps more.

"Combining the bigger-than-expected trade deficit with other weak data suggests that Q2 growth was only 1.2% rather than the 2.4% originally estimated, placing the economy on even shakier ground than it seemed," wrote Nigel Gault, chief U.S. economist at IHS Global Insight, "and underlining why the Fed has shifted towards an easing bias," according toThe New York Times.

Consumer confidence could begin to erode. The Conference Board's measure of confidence fell in both June and July. Recent data on retail sales indicate that many people have stopped coming into stores, shops and big-box retailers at the rate that they were in the spring.

Wal-Mart, Home Depot Earnings a Good Proxy

Wal-Mart Stores (WMT) and Home Depot (HD) will report earnings this week. Because of Wal-Mart's size, it is considered a good proxy for middle- and lower-class spending. Its estimates for the next quarter and the rest of the year will be as important as any government data. Home Depot's predictions for the rest of 2010 will be telling about the direction of the housing market.

Enough information about the state of the overall economy will become available between now and mid-September to set the mood for the market for most of the rest of the year, or at least until holiday spending data begins to be released in November.