A Busy Week Ahead
Sunday January 13, 6:00 pm Eastern Time
Forbes.com
By Tara Murphy
Even though the holiday season is over, investors have continued to feast on stocks in the first weeks of 2002. But that buying spree could come to an abrupt halt this week, when earnings releases give the markets a shot of reality.
Sending the Nasdaq Composite up a robust 3.6% since Jan.1, stock buyers have been putting their money to work in the technology sector, which is starting to look overbought. Investors have been betting that tax cuts and the Federal Reserve Board's unprecedented rate cuts will spur an economic recovery by the second half of 2002.
But, with ongoing job cuts and sluggish consumer sentiment, the timing and speed of the recovery is starting to look uncertain. That's keeping the cloud over corporate profits, and negative fourth-quarter earnings reports this week could accelerate the tone set last week, when the Dow Jones Industrial Average lost 1.8% and the Nasdaq gave back 1.7%.
"We've had the bulk of the run, until we get the fundamentals to catch up with the valuations," says Tony Dwyer, chief market strategist at Kirlin Holdings, who points out that the market's recent strong volume during rallies is a positive indicator.
Tech fundamentals heading into 2002 continue to hover at cyclical lows, according to Salomon Smith Barney research. Since the economy remains sluggish, the firm estimates tech earnings per share will decline 4% this year after accounting changes are factored in.
"Smaller earnings declines will continue before significant recovery is likely in 2003," writes Salomon Smith Barney economist Steven Weiting, in a research note to clients, noting that tech earnings fell 58% in 2001.
Reports are due out this week from Charles Schwab , Fannie Mae , Tyco International , eBay , Juniper Networks , Duke Energy , Compaq Computer , Apple Computer and Ford Motor , along with a several other companies.
Despite what could be shaky fourth-quarter earnings reports, corporate guidance should be more encouraging, according to Dwyer.
Stocks will also have to contend with the release of market-moving economic data this week. On Jan. 15, December retail sales roll out, followed by the December Consumer Price Index and the Federal Reserve Board's Beige Book. Business inventories for November come out on Jan. 16. Housing starts for December and the Michigan Consumer Sentiment index--two important indicators of consumer behavior--wrap up the week, on Jan. 17 and Jan. 18, respectively.
Peter Cardillo, chief strategist at Westfalia Investments, says if next week's economic data reinforce Federal Reserve Board Chairman Alan Greenspan's concerns that Wall Street is overly optimistic about an imminent economic recovery, stocks will come under immediate pressure. Wall Street expects Greenspan to slice the fed funds rate a quarter of a percentage point this month, after cutting rates by 475 basis points in 2001.
"Mr. Greenspan is throwing chills at the market," says Peter Cardillo, chief strategist at Westfalia Investments, referring to the Federal Reserve Board chairman's comments that there's still weakness in the economy, made at the Jan. 11 Bay Area Council Conference in San Francisco.
Meanwhile, big job cuts were announced on Jan. 11, with Ford cutting 28,000 workers. Some economists estimate that the unemployment rate will creep past 6% before the recession is over.
Cardillo thinks sour earnings have already been factored into the stock market, pointing out that there have been fewer preannouncements.
Let's hope he's right. Otherwise, it could be a bumpy week. |
