US economic optimism may trump GM bankruptcy

• Source: Sina
• [15:42 June 01 2009]
• Comments

General Motors world headquarters is shown in Detroit, in this Tuesday, April 21, 2009 file photo. (AP Photo)

Wall Street faces a historic shake-up next week as General Motors, a pillar of American industry, heads into bankruptcy, but the market could advance further if economic data signals the worst of the recession has passed.

Stocks could also get a boost if commodity investors see more signs of a recovery in demand as it would boost profits and share prices of resource companies, and particularly the oil industry.

Though the markets closed out May with a third straight month of gains, the longest monthly winning streak since the fall of 2007, the broad S&P 500 appears stuck in a range around the 900 level.

Action in the foreign exchange market and turmoil in US government bonds could undermine the S&P 500, however, as it tries to keep a grip on the nearly 36 percent gain accumulated since diving to 12-year lows in March.

"If you have a return to some level of growth, with some moderate inflation, that would be the most positive scenario for equities and you could see more of a rally," said Sasha Kostadinov, portfolio manager and research analyst at Shaker Investments in Cleveland, Ohio.

Analysts said a GM bankruptcy was unlikely to have much of an impact on the market in itself -- the once mighty automaker's shares have plunged below $1, making its weight less influential.

Nonetheless, the bankruptcy will likely have ripple effects on the broader economy, particularly through job losses.

GM's stock is widely expected to be removed from the venerable Dow Jones if it files for bankruptcy. Speculation on what company might take its place on the 30-stock index ranges from Google (GOOG.O) to Goldman Sachs (GS.N) to Monsanto (MON.N).

Stocks have been unable to put together a significant advance in the last few weeks. The dollar hit a five-month low against major currencies worldwide and certain world markets reached highs for 2009, but the appetite for risk has, of late, not translated into substantial gains in US equities.

That may be, in part, due to rising bond yields, as investors have grown concerned about the increased need for borrowing by the US government.

All eyes will be on Federal Reserve Chairman Ben Bernanke when he addresses lawmakers in Congress on Wednesday as investors will be looking for signals of the Fed's thinking on the recent surge in the supply of US government debt.