The stock market has been drifting, stalling a three-month rally, and analysts say investors need to see more concrete signs of economic growth before they'll take stocks higher.
At the same time, concerns are growing over climbing interest rates, a falling dollar and rising commodity prices — all factors that could inhibit recoveries for the market and the economy.
Analysts have warned that the market may have rallied more than economic fundamentals warranted this spring, and that a significant pullback is in order given how far and how fast stocks rose. A gain of 40 percent — like the one in the Standard & Poor's 500 index since early March — usually takes years, not months.
But while stocks are no longer barreling higher as they did in the early spring, they have yet to retreat meaningfully, and that's a sign of strength in the market.
The major stock indexes moved little last week, rising less than 1 percent after big gains the week before. The S&P 500 index ended the week up 6 points, while the Dow Jones industrial average added 36 points and the Nasdaq composite index rose 9 points. The Dow, however, managed to show a gain for the year by the close of trading on Friday.
"I'm inclined to take the market action the last two weeks as reasonably positive," said Uri Landesman, head of global growth strategies at ING Investment Management.
Still, a pruning of 10 percent in the market is not out of the question, analysts said.
"Unless we get some kind of clear picture of what the future has to bring and where growth is going to come from in the short term, I don't know that there are any acute drivers out there," said Kim Caughey, vice president and investment analyst at Fort Pitt Capital Group in Pittsburgh.
Among the biggest threats to the market's rally right now are concerns over rising interest rates and inflation — worries that have grown as the dollar weakens against other currencies.
The dollar has fallen steadily over the past three months partly because of the signs of economic improvement that sent investors in search of bigger returns in riskier assets like stocks and commodities.
But concerns over the government's mounting debt load have further shakened the greenback and sent yields on Treasurys climbing. Investors are concerned about the huge inflow of government debt into the market, part of the Treasury's efforts to fund the country's stimulus programs. They're worried that an oversupply of U.S. debt will scare away buyers, who then won't need to buy dollars in order to purchase Treasurys.
The big debt sales are also multiplying investors' concerns about inflation. There's a growing belief in the market that the Federal Reserve will make inflation fighting a priority and start raising interest rates again. That in turn, could stifle an economic recovery: Long-term bond yields are tied to mortgages and other consumer loans, which means borrowing costs are rising at a time when Americans are still under considerable financial stress. And a prolonged decline in the dollar would further erode the buying power of consumers.
As a result, investors will stay focused on how much demand Treasury auctions garner in the coming weeks. This week, the Treasury will auction off 1, 3, and 6-month bills.
Other important reports this week include the National Association of Home Builders housing market index for June, to be released Monday. The following day, the Commerce Department will issue a report on housing starts for May.
In addition to those reports, the Labor Department will release its producer price and consumer price indexes for May, while the Federal Reserve will release a report on industrial production.