Wall St. led by sentiment
Last week's rate cut renews investor confidence as results wind down
By Staff Writer Catherine Tymkiw
February 4, 2001: 7:00 a.m. ET
NEW YORK (CNNfn) - It's safe to step back into the water this week. Now that earnings season is winding down and the Federal Reserve came through with a widely anticipated rate cut last week, investor psychology is expected to rule the markets once again.
And analysts say that's not such a bad thing. Most bet that confidence will start to build and, looking forward, money will continue to enter the market.
"We're going to look at any economic news that shows the economy is starting to pick up steam," said John Forelli, senior vice president with Independence Investment Associates. "Anything on the front end of the economy where the consumer is – if that starts to pick up steam then that's going to give investors confidence that the economy is going to pick up."
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But with little on the economic front to digest this week, experts say investors would be best served to step up their holdings in cyclical issues as technology stocks may start to pull back after a steady run-up last month.
"Short term, technology has had a sharp technical rebound so I wouldn't be surprised to see technology take a breather," said Forelli. "Consistent steady growers could be making a rebound like consumer stocks and pharmaceutical stocks that have had a poor month."
Wall Street's ride
Last week, U.S. stocks had a bumpy ride as they digested a slew of earnings reports, the Fed rate cut and some major economic data. But investors are starting to pick their spots and put money back into the markets, cheering the Fed's action and hoping the bad news has been largely factored in.
We got the bulk of the action (last) week and the market is definitely on a number-to-number mentality," said Bryan Piskorowski, market analyst with Prudential Securities. "It's a really light week on the data calendar and, ultimately that's going to be the proof in the pudding—how are we going to trade in an information vacuum."
The Nasdaq ended the week on a down note, falling more than 4 percent Friday while the Dow industrials fell more than 1 percent and the S&P 500 slipped 1.8 percent.
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"Investors are going to look at whatever economic numbers come out and say is this additional fuel for the Fed to lower rates in March. Earnings are going to continue to come out and they're likely to be negative so you're going to have earnings weighing on the market," said Sam Stovall, investment strategist with Standard & Poor's.
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"At the same time, the support is from the lower interest rates and reports that come out indicating our economy is soft and the Fed is likely to continue to lower rates," he added.
The Fed and the economy
The Federal Open Market Committee (FOMC), the Fed's policy-making arm slashed interest rates by a half point. The cut came less than a month after the Fed surprised the market with a half point rate cut Jan. 3.
The two cuts came after six interest rate hikes from June 1999 through May 2000 as the Fed aimed to temper the surging economy and ward off inflation.
Sharon Lee Stark, managing director of fixed income research and strategy at Legg Mason, told CNNfn's In the Money that the Fed would likely become more aggressive with cutting rates in light of continued weak economic data. (388K WAV) (388K AIFF)
Recent data have shown a slowing economy, led by sharp slowdown in the manufacturing sector as seen in last month's surveys from the National Association of Purchasing Manufacturers (NAPM). But last Friday's jobs report painted a mixed picture. While the unemployment rate for January, rose to 4.2 percent, its highest level since July 1999, job creation increased.
The Labor Department said the economy created 268,000 jobs last month, boosted by an increase of 145,000 jobs in the construction sector. Most of the jobs resulted from harsh weather conditions in November and December which hurt construction and created a seasonal rebound.
But analysts are not discouraged and say the Fed is doing its job and the economy is not headed down the drain.
"The manufacturing sector is going to continue to show bad news over the next three to six months, but if we get the indication that consumers are starting to buy more, then things like the NAPM will start to reverse themselves later this year," said Forelli.
It's not just the economy that has been weighing on investor sentiment. Poor quarterly results and negative guidance have prompted investors to err on the side of caution as they try to gauge how corporate profits will shape up for the rest of the year.
This week, there are still several companies reporting quarterly results, with the most notably technology firms, Cisco Systems and WorldCom, posting their results for the December quarter.
"Right now there's still that tug of war that is going to be going on between those people who feel optimistic about the Fed's aggressive rate easing and those who say that earnings look bleak and expect to look bleaker," said Sam Stovall, investment strategist with Standard & Poor's. "If the Fed is not gauge to meet until the end of March, we have this pretty long stretch until we get another shot in the arm with lower interest rates."
Cyclicals in focus
In the month of January, the best performing industries included technology, retail consumer cyclicals and telecom, according to Standard & Poor's.
"Basically the top ten industries were those that are economically sensitive and are bouncing back from their deeply oversold condition last year as a result of lower interest rates," said Stovall. "We do believe the Fed will remain aggressive with its easing interest rate policy but we feel the earnings are going to be pretty bad for the first quarter, so the market is likely to tread water for awhile."
Bracing for poor news on the economic front and continued weakness in corporate quarterly results going forward, analysts say cyclicals are safe bets for investors in the short-term. And longer-term, investors will start to see the results of the Fed's actions and corporate results are likely to look more rosy.
"I can see the market getting a little more defensive going forward. You want to be in companies that have steady outlooks or increasing outlooks," said Forelli. "As the year builds people are going to get more and more confident that they should be fully invested."
Agreeing with Forelli, Standard & Poor's Stovall said the ten industries with the S&P 500 that posted the best performance in January have gone on to outperform the S&P 500, as a group, since 1970.
This bodes well for investor sentiment.
"I still think it's a relatively fertile investing environment. There are better roads ahead and the market is generally going to try to consolidate and deal with a slowing economy," said Prudential's Piskorowski.
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