Sunday August 5, 2:37 pm Eastern Time
Wall St. Week Ahead-Stocks to gain on Fed rate-cut hopes
By Chelsea Emery
NEW YORK, Aug 5 (Reuters) - Expect stocks to move higher this week, as Wall Street anticipates the economic boost expected from a likely interest-rate cut at the Federal Reserve's next meeting later this month.
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The Fed has reduced interest rates six times so far this year to jump-start the sluggish economy, and securities firms surveyed by Reuters unanimously expect another rate cut of a quarter point on Aug. 21.
Economists say rate cuts take six to nine months to work their magic, but Wall Street pros say they want to jump in early.
``I want to be a net buyer, rather than sitting on the sidelines and missing a touchdown,'' said David Sowerby, a portfolio manager for Loomis, Sayles & Co.
This sentiment is likely to grow as the expected rate cut nears, market pros said.
``As we get closer to the Fed meeting, the market will get more excited,'' said Louis Navellier, who oversees $6 billion for Navellier & Associates in Reno, Nevada. ``I expect we'll meander about 3 percent higher'' over coming weeks.
Major stock-market indexes rose slightly last week, as lackluster profit reports weighed down rate-cut optimism.
The Dow Jones industrial average (^DJI - news) gained 0.9 percent, the technology-stock laden Nasdaq composite index (^IXIC - news) was up 1.8 percent, and the broader Standard & Poor's 500 index (^SPX - news) rose 0.7 percent.
Since the market's lows in spring, the S&P 500 has clambered 8.6 percent higher, while the Nasdaq has jumped about 26 percent.
``People are looking forward to a rate cut,'' said Dan Rivera, chief investment officer of American Express Asset Management Group's large-cap growth division. ``They're looking for things to start to improve. The market is telling you that.''
The second-quarter earnings season is coming to a close, but investors say they won't relax until seeing Cisco Systems Inc.'s (NasdaqNM:CSCO - news) profit report, expected on Tuesday after exchanges close. Consumer products maker Procter & Gamble Co. (NYSE:PG - news) will also likely report quarterly results on Tuesday.
Wall Street will also scrutinize retailers' reports for a sign of how well consumer spending is holding up. Catalog and Internet retailer Lands' End Inc. (NYSE:LE - news) is expected to report profits on Wednesday, while trendy casual-clothing seller Abercrombie & Fitch Co. (NYSE:ANF - news) is anticipated to report results on Thursday.
In addition, on Thursday, many retailers will report July sales at stores open at least a year. Wall Street's hopeful outlook could cloud up if the data show signs consumers have slowed spending on worries about the economy.
Wall Street will also closely follow economic reports this week. On Wednesday, data from the Fed's latest anecdotal survey of national economic conditions, known as the ``Beige Book,'' may help illuminate an uncertain outlook.
Jobless claims for the week ended Aug. 4 are expected on Thursday.
``I'll be watching job cuts to make sure they're not hitting the consumer sector,'' said Navellier.
A key gauge of inflation, the Producer Price Index, is expected on Friday.
PROFIT OUTLOOK
Wall Street no longer expects Corporate America to turn the corner this year. Analysts forecast companies in the S&P 500 will report flat earnings for 2001 amid a sluggish economy and lackluster sales, according to market research firm Thomson Financial/First Call. Just four months ago, analysts predicted profit growth of 12.6 percent.
It would be the first time since 1991, when the U.S. economy was mired in recession, that corporate profits have been flat or lower for four consecutive quarters, according to First Call.
An uptick in profits has now been shoved out to the first quarter of 2002. Analysts predict growth of 10.2 percent for the January-March period, First Call said.
But profit growth or no, money managers say the Fed's rate cuts, combined with a tax cut, will soon jump-start the economy and stocks.
``We're in a profits recession, but not in an economic recession,'' said Sowerby. ``The market understands the Fed has, at least, a half-point rate cut to deliver this year and that is first and foremost the market's best friend.''
ECONOMIC OUTLOOK
Expectations for multiple rate cuts in the remainder of the year have been steadily rising in reaction to data showing the economy barely grew in the second quarter and manufacturing activity in July showed no sign of recovering.
The Fed has cut the cost of overnight bank borrowing, the benchmark for short-term interest rates, to 3.75 percent. Now all 25 primary bond dealers, which work directly with the Fed in fixed income markets, expect the Fed to cut rates another quarter point, according to a Reuters poll.
The rate cuts ``work with a 9 to 12 month lag and we're within a couple of months of starting to see better growth,'' said John Zimmerman, senior vice president at Banc of America Capital Management Inc. ``Now is the time for investors to be seriously looking at equities.''
The job market last month is showing unexpected resilience. On Friday, the U.S. Labor Department said the unemployment rate in July was 4.5 percent, less than the 4.6 expected by economists polled by Reuters.
``I'm going to be on pins and needles hoping bad news doesn't come out and throw cold water on the market,'' said Navellier. ``But I think the worst is over. I think we're going to meander higher here, in a herky-jerky manner.'' |
