- The Washington Times - Sunday, July 31, 2005

NEW YORK (AP) — Wall Street’s predictions of a summer rally were borne out in July, with stocks enjoying surprising gains thanks to good economic data and a solid earnings performance from corporate America. But as Friday’s losses illustrated, investors might be wondering whether stocks are due for a downturn.

In the long term, the economy appears to be going strong and might not register an expected slowdown in the second half of the year. But unless more evidence of robust economic and profit growth is offered in the week ahead, investors appear willing to cash in instead of taking further risks.

July was an outstanding month, with the Dow Jones Industrial Average rising 3.56 percent, the Standard & Poor’s 500 index climbing 3.6 percent and the Nasdaq Composite Index surging 6.22 percent.

The rally could continue as long as the economy shows signs of growth and corporate earnings remain healthy. Even then, however, an overly strong economy could raise concerns about the Federal Reserve’s interest-rate policy. Steady economic growth virtually guarantees a continuation of the Fed’s slow, steady rate increases through the end of the year. If the Fed goes too far, the economy’s growth could see an abrupt slowdown as business and personal loans become more expensive.

The Labor Department’s job-creation report, due Friday, is a proven market-mover, and has the potential to single-handedly keep the summer rally afloat, or halt it for good. Economists predict that the economy will have created 183,000 jobs in July, up from 146,000 in June.

Also this week, the Institute for Supply Management will release its closely watched manufacturing and service sector indexes. The ISM manufacturing index, due out today, is expected to rise slightly to 54 in July, slightly higher than June’s 53.8 reading. A better-than-expected number is possible, however, as the Chicago Purchasing Managers Association index of Midwestern manufacturing showed strong gains Friday.

On Wednesday, the ISM services index is due out, and economists expect a slight decline to 61 from June’s 62.2 reading. A reading of 50 on both ISM indexes indicates growth.

Within the S&P; 500, 370 companies already have reported earnings, but plenty of companies will be reporting in the week ahead. However, most major corporations have reported, and few reports this week appear to be able to move the market substantially.

Procter & Gamble Co. could give investors clues today as to consumers’ spending appetite. The health care and personal goods manufacturer is expected to earn 55 cents per share, up from 30 cents per share a year ago. The stock rose steadily through the July rally, closing Friday at $55.63, almost 10 percent above its 52-week low of $50.53 on Oct. 28, 2004.

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