Wall St Week ahead- Market stalls but investors calm

More bad days may be in store for stocks in coming weeks, but investors aren't pressing the panic button. Not yet.

With weak job growth and the end of the Federal Reserve's stimulus program staring investors in the face, the 5% drop in S&P 500 from last month's high is half way toward the market's common definition of a correction -- a 10% fall from a recent peak.

Also read: Jobs, services data paint gloomy picture

But fund managers displayed caution, rather than distress. Most see the recent data confirming a soft patch, or slowdown, after the government said the economy created a meager 54,000 jobs in May. Others are thinking the economy may be headed for a double-dip recession.

The sharp fall in bond yields also points to a similar concern, but a full-blown downturn in equities isn't in the cards yet, investors say.

"The markets will be choppy. They'll be looking for validation that this is just a soft patch we're going through, not the economy rolling over," said Mike Ryan, the New York-based head of wealth management research for the Americas at UBS Financial Services Inc, which oversees about USD 641 billion.

Some concede the stock market could see further declines from sovereign debt problems in Europe or a spillover of violence in Yemen into Saudi Arabia, which could lift oil prices, hurting the consumer.

The lack of market-moving economic data or corporate earnings next week could also make nervous investors hit the sell button more often than not. But the market mantra of "buying the dip," which has worked since the Fed started round two of its quantitative easing in August could prevail.

"Is another 5% (decline) possible here? I don't see why it wouldn't be, given the risk of contagion in Europe," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, which manages about USD 14.8 billion.

"The market is constantly reconciling the fact that it's a slow recovery. We had a painful crash and a crisis and we are painfully, gradually getting out it. This pullback, and potentially further pullbacks from here in the next couple of months -- I view these as attractive entry points for longer-term investors."

Data that showed net inflows into global equity funds could confirm investors are not ready to throw in the towel.

Equity funds tracked by EPFR Global saw inflows of USD 1.7 billion in the week ending last Wednesday, distributed evenly between developed and emerging markets. The data comes after three weeks of outflows totaling USD 18 billion. Bond funds took in some USD 3.5 billion in net inflows, a sixteenth straight week of inflows.

From a technical standpoint the US stock market showed some resilience also, despite the dismal jobs data.

The S&P 500 on Friday bounced back after dipping below 1,300, keeping the April low just under 1,295 as strong near-term support.

To be sure, not all investors see just a soft patch in the economic data. Friday's payrolls report confirmed the loss of momentum in the economy, which was already flagged by other data from consumer spending to manufacturing.

And the end of the Fed's QE2, which helped lift the S&P 500 30% in the eight months to the end of April, is robbing the market of a much-needed source of liquidity.

"We'll see a selloff in the risk-on trades, in commodities and in global and US stocks and the money is going short-term into the bond market," said Charles Biderman, chief executive of TrimTabs Investment Research in Sausalito, California.

"I just don't see where the money is coming from to take stocks higher, if the government is not going to be providing it."