The Coming Week: More of the Same Lousy Cocktail Won't Clear Investors' Heads
Kristen French
20:34 GMT-04:00 Saturday, July 28, 2001
Wall Street will be fed its standard diet of earnings reports, corporate outlooks and economic data this week. While the latest economic scorecard on the manufacturing sector may be the X factor, all indications are that the earnings meal once again will leave a bad taste. "The market will continue to be confused," said Stanley Nabi, managing director at Credit Suisse Asset Management, who sees a "mild downward bias" for the market this week. Others take a more sanguine stance. "The market has a positive tone right now as the worst news is out and people believe the economy is beginning to bottom," said Matt Johnson, head of trading at Lehman Brothers. "We're range-bound but we're probably at the lower end of the range, so there'll be room to go up." On tap this week are some key pieces of the economic puzzle. The National Association of Purchasing Managers on Wednesday will release the Purchasing Managers' Index for July. All eyes will be on the PMI to see whether purchasing activity by corporate America is picking up a little or declining. The forecast is for a reading of 44.6, down from 44.7 in June -- the highest level since November 2000. A reading below 50 signals contraction. And more news is coming on the employment front: The initial jobless claims for the week will be released on Wednesday, previewing Friday's employment report for July by the Labor Department. Until then, Wall Street may spend part of this week grappling with lingering concerns over the gross domestic product figures released Friday. Friday's preliminary GDP report showed that the economy grew at a weaker-than-expected pace of 0.7%, down from a 1.3% rate in the first quarter amid a significant drop in equipment and software spending. Second-quarter growth was the slowest since the first quarter of 1993, when GDP declined 0.1%. This was also below market expectations for a 1.0% rise. Nabi, who said the report "raised more questions than settled issues," also pointed out that sectors that supported the economy earlier this year, including government spending and housing-related expenditure, seem to be weakening. "Right now, if I were pushed to make an estimate of GDP in the third quarter, it's very likely to be negative. I believe it's too early to declare that the economy will be out of woods and that we can anticipate recovery." And the profit recovery will be much slower than the economic recovery, the strategist was quick to add. Companies rolling out second-quarter results this week include Adobe Systems (ADBE:Nasdaq) and KLA-Tencor (KLAC:Nasdaq) on Monday, Verizon (VZ:NYSE) on Tuesday and Global Crossing (GX:NYSE) on Wednesday. Investors will pay heed to what each company has to say about its outlook for the remainder of the year, though the chances of getting positive signs for the here and now seem unlikely. "Nobody expected the second quarter to be a strong quarter, however it's turning out to be weaker than expected," said Thomas Van Leuven, market strategist at J.P. Morgan. The third quarter is already starting to look uncannily similar. According to research by Thomson Financial/First Call, there have been 331 preannouncements for the third quarter so far, of which 213 have been negative. Last week, the major indices stayed in a narrow range for the second week in a row. The Nasdaq rose less than a point for the week, while the Dow Jones Industrial Average fell 1.5%. The SP 500 edged lower by 0.4%. The GDP numbers showed more pain for corporate America, especially the tech sector, and that may reverberate during the week's earnings reports. The report showed that equipment and software spending fell 14.5% in the second quarter, compared with a 4.1% drop in the first quarter. The durable goods
report out Thursday showed second-quarter orders for communications equipment shrinking by 26% from the first quarter. And the repercussions of the spending crunch are popping up everywhere. Heavyweights Hewlett-Packard (HWP:NYSE) and JDS Uniphase (JDSU:Nasdaq) were the fallouts last week, establishing new 52-week lows after their piled-on earnings disappointments and layoffs. This cocktail of lousy earnings and outlooks, plus dreary economic data, may combine to again push back expectations for a bulls' revival. "I believe there's further work to do by the market in consolidating current levels before it moves up," said Nabi. "Having said that, I think the lows established in April this year may hold. But the problem is, I don't see recovery in the market coming so rapidly."
globeinvestor.com |
