US STOCKS rebounded last week as economic and earnings data was seen as tying the Federal Reserve's hands for the rest of the year. However, the wheels could come off the rally if a long-awaited report from China on Monday causes another shock.
The Dow Jones Industrial Average has now risen for three straight weeks and is only about 6 per cent from its all-time high, halving its losses from its low for the year.
The cyclical stocks that took such a beating in the summer when Chinese growth worries first surfaced - energy, materials, emerging-markets and industrials stocks - are now up and running again. Traders are betting that Chinese demand has not slowed down as much as feared.
The tone of the week could be decided by the Chinese third-quarter gross domestic product report. Expectations are for growth of around 6.8 per cent, but recent export data suggested the nation might miss its 7 per cent growth target by even more.
"China's a big wild card," said Matt Kaufler, a portfolio manager at mutual fund firm Federated Investors. "There's a lot of mixed data points as that economy transitions from being investment-led to more consumption-led."
Last week, General Electric assuaged worries about a recession spreading worldwide from China when the industrial conglomerate posted operating earnings that were better than forecast. GE is not missing the hundreds of billions of dollars worth of financial operations it recently disgorged.
The company's shares have had their best run since the financial crisis this month, rising roughly 20 per cent. In the third quarter, GE executives said rising demand for airplane engines and train cars is more consistent with economic expansion than contraction.
Sam Stovall, chief equity strategist at Standard & Poor's Capital IQ, said the US economy looks set to grow at a subpar rate through 2016, without slipping into recession.
The most convincing argument that the US recovery is intact comes from the jobs data. New weekly jobless claims, essentially a census of recently laid off workers, hit its lowest level since 1973. Jobs are easier to find - and to hang on to - than they have been for a generation. This is one reason that Janet Yellen and other Fed officials still insist they will hike rates in October or December, even as odds of a hike this year have shrunk to near zero on futures markets.
This week, stock market bulls will hope more bad news on the US economy to erase all possibility of a hike, but they may be disappointed by strength in used home sales and employment data.
While companies selling to US consumers are in a relatively strong position, those who generate most of their sales from overseas could tell a very different story. Outside the aerospace business, where GE has concentrated efforts, markets for industrial goods, and - particularly - raw materials are shrinking.
Oil has found buyers between US$45 and US$50 a barrel, but analysts are bitterly divided on the question of whether this is a fleeting respite or a lasting turnaround. Energy equity analysts at brokerage Morgan Stanley said recent production cuts by US shale drillers should bring supply and demand back into equilibrium by mid-2016, bringing a definitive end to the oil bust.
Others argue that the lifting of sanctions on Iranian oil will easily replace whatever oil is taken out of global markets by production cuts. Even if prices do rise from here, oil companies' earnings will suffer by comparison with this time last year, when futures were closer to US$100 a barrel.
The US dollar, whose strength has only begun to wane since the end of the third quarter, will dilute earnings for many companies reporting this week, including IBM Corp. Like other old-line tech companies such as Intel and Microsoft, IBM is a global company; analysts are watching its earnings to see if US growth is enough to keep IT sector strong.
"The angst is two-fold: one is just the currency effect that hits a lot of these companies," said Mr Kaufler of Federated Investors. "Beyond the currency effect, investors are trying to get to the heart of what's going on in major trading areas such as China and the eurozone."
Almost one in five of the Standard & Poor's 500 companies has already warned investors about weakness in their earnings this quarter, according to data from Thomson Reuters. The aggregate earnings look likely to decline from a year earlier.
Walmart shares had one of their worst weeks in years after the retailer warned that it would not see any earnings growth this year. Efforts to build out its online sales and a decision to boost wages for some workers had eaten away profits from modest sales growth, according to Walmart executives.
Beyond China and earnings, there is one even more powerful force in the stock market. "The market has made a very smart recovery off the lows," said Quincy Krosby, market strategist at Prudential Financial. "A factor is obviously the higher chance that the Fed is on hold this year."