There is only a small amount of new economic data on tap this week, but that doesn't mean investors should expect smooth trading.
In Canada, sentiment will likely be shaped by second-quarter bank results, which begin to flow Tuesday starting with Bank of Montreal.
Meanwhile, markets everywhere will be awaiting comments on Friday by the chairman of the U.S. Federal Reserve.
Ben Bernanke is scheduled to speak in Jackson Hole, Wyo., the location where a year earlier he signalled a massive stimulus plan that sent markets on a seven-month binge. Mr. Bernanke recently said that more stimulus could be forthcoming if economic conditions worsen.
"He will likely indicate that the option is still on the table, conditional on weakening activity and clearer evidence of possible deflation," says Emanuella Enenajor, an economist with CIBC World Markets Inc.
In the runup to the speech, other data will be eagerly perused for evidence about where the economy is headed next. Canadian retail trade figures for June, due on Tuesday, are expected to have crept up by 0.7 per cent from the previous month.
In the U.S., the Department of Commerce will report Wednesday on durable goods orders for July. Economists expect a 2.3-per-cent rise, aided by automotive and airplane purchases, compared with a 1.9-per-cent decline the previous month. On Friday, second-quarter GDP could see a revision from the preliminary 1.3 per cent reported a month ago. A downward tick would stoke investor fears.
Since April, North American stocks have tumbled 15 per cent. European losses are even greater, with France and German bourses down about 25 per cent.
Investors fear another recession is on the way, but a critical piece of economic data won't come until next week, when the U.S. Institute for Supply Management releases its August manufacturing index. The index dipped perilously close to 50 in July, a threshold that signals a contracting sector.
Vincent Delisle, a strategist with Scotia Capital Inc., says there is a risk that the ISM survey will fall to 45 or below, at which point corporate earnings growth is in jeopardy. "Still, with bond yields hitting multi-decade lows ... we believe the equity risk-reward outlook is increasingly compelling," he wrote.
In fact, many money managers are looking at the relationship between bonds and equities and concluding that stocks won't stay down for long. For the first time since the 1950s, companies are paying larger dividend yields than bond yields.
"There are a lot of nonsensical things going on in the marketplace," says value investor Irwin Michael, president of I.A. Michael Investment Counsel.
With inflation now hovering near 2 per cent and five-year U.S. Treasuries paying less than 1 per cent, government bonds are a sure way to lose money, he says.
"I feel a lot safer in a stock trading at a discount to book value and paying a dividend of 3 or 4 per cent, than I do in a so-called risk-free T-bill," says Mr. Irwin, whose firm manages the ABC Funds. He predicts that some of the fear we are seeing in the market today will turn to "panic buying" before the end of the year.
But this buying will only materialize if the lull in the economy turns out to be a cyclical downturn rather than a structural issue. Geopolitical strategists at National Bank Financial say the key problem today is weak consumer demand, to which there is no end in sight.
"We [reject]the notion that the U.S. economy is in the midst of a cyclical and temporary 'soft patch'...," note analysts Pierre Fournier and Angelo Katsoras. "Recent events, including the deepening crisis in the euro zone, the self-destructive debt ceiling debate and the S&P downgrade are both symptoms and consequences of much deeper structural issues affecting advanced economies which require long term solutions, not quick fixes."