Steady's the Word for Fed and Stocks
By Elizabeth Lazarowitz
NEW YORK (Reuters) - First, the good news for stocks: The Federal Reserve next week is likely to say it's done with its rate-cutting spree, hinting at an economic recovery to come, and nudging the equity market higher.
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Now the bad news: Mixed signals on the economy, weak corporate earnings and lukewarm profit forecasts will cast a pall on Wall Street's mood, pulling stocks in the opposite direction.
The result: A virtually unchanged market, experts say.
The Fed's policy-setting committee has its first meeting of the year next week. Federal Reserve Chairman Alan Greenspan has hinted that the central bank will put an end, for now at least, to the aggressive rate cutting that drove short-term interest rates to 40-year lows.
``That might be good for stocks, in that if the Fed doesn't have to cut, it sends a signal that it thinks the economy has started to pick up,'' said Peter Coolidge, senior equity trader at Brean, Murray & Co.
Nevertheless, Wall Street pros expect the market to seesaw in the days ahead as investors grapple with the question of whether stocks are too pricey -- given the market's strong run late last year, tepid earnings forecasts and inconsistent economic data.
While more than half of the companies in the S&P 500 have issued their corporate report cards, a torrent of results is on its way. Tech giant Texas Instruments (NYSE:TXN - news) and two blue-chip names -- American Express Co. (NYSE:AXP - news) and The Walt Disney Co. (NYSE:DIS - news) -- are scheduled to report earnings next week.
Wall Street also will have a slew of fresh data on the U.S. economy to scan through, including reports on fourth-quarter gross domestic product (GDP), durable goods, consumer confidence, personal income and spending data, and monthly unemployment statistics.
``Investors are torn between looking back to what happened last quarter during the recession and projecting forward to where we see a recovery in the economy,'' said John Davidson, president and chief executive officer at PartnerRe Asset Management, which oversees $4 billion.
Davidson added that the market's fourth-quarter strength leaves little room to rally.
WALL STREET SEES STEADY FED
On Thursday, Fed Chairman Alan Greenspan raised expectations the central bank will leave interest rates alone next week after he said the U.S. economy is emerging from recession. He questioned the need for a fiscal stimulus package.
Stocks rose on the Fed chief's comments, which were noticeably more upbeat than remarks he made earlier this month. He conceded that he could have made a better choice of words in his previous remarks.
The Fed is expected to leave its benchmark federal funds rate unchanged at 1.75 percent at the end of its two-day meeting next Wednesday, according to 22 out of 24 primary dealers of U.S. government securities polled by Reuters.
Most dealers expect the Fed to hold rates steady until at least the middle of this year. Worth noting: A hefty majority see the Fed raising rates by the end of 2002. The Fed cut rates 11 times last year to help salvage the crumbling U.S. economy.
Despite growing expectations of an economic rebound, however, many fund managers see little hope for a big surge in the stock market until true signs of a turnaround emerge.
``It's great to say it, but let's see it,'' said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank Private Banking, which oversees about $9 billion, in reference to Greenspan's comments this week. ``With the market trading at 23 times earnings, you really need that second confirmation that Corporate America is fixed.''
The S&P 500 jumped 9 percent in the final quarter as investors placed bets on an economic rebound, following the stock market's plunge to three-year lows in the wake of the Sept. 11 attacks on New York City's World Trade Center and the Pentagon.
GRIM EARNINGS PARADE RESUMES
Wall Street has just wrapped up the busiest two-week stretch of one of the worst earnings periods in 10 years. The S&P 500, the Nasdaq Composite index and the Dow all ended a shortened trading week up around half a percent.
``There's no way you can look at the fourth quarter and say there were many good hot spots, in terms of earnings,'' said Bernard Horn, president and portfolio manager at Polaris Capital Management.
Fourth-quarter earnings are expected to show a drop of 21.5 percent, running neck-and-neck with the third quarter's drop of 21.6 percent -- the worst in a decade, according to earnings tracking firm Thomson Financial/First Call.
One bright spot: Out of the 265 S&P 500 companies to report so far, 59 percent exceeded Wall Street's expectations; 27 percent met them, and 14 percent missed forecasts.
Wall Street stalwarts like Coca Cola Co. (NYSE:KO - news) and Honeywell (NYSE:HON - news) are on tap to report earnings. Also on the earnings grid: oil heavyweight ChevronTexaco (NYSE:CVX - news), office equipment company Pitney Bowes (NYSE:PBI - news), and consumer products giants Gillette (NYSE:G - news) and Procter & Gamble (NYSE:PG - news); tech name Veritas Software (NasdaqNM:VRTS - news), and a fistful of telecommunications firms, such as AT&T (NYSE:T - news); AT&T Wireless (NYSE:AWE - news); Verizon Communications (NYSE:VZ - news) and Qwest Communications (NYSE:Q - news).
[Harry: It is interesting how they are spinning this. Even if demand has bottomed, there are still the inventory issues to contend with. I think those issues will be resolved later than what is being projected. Also, as interest rates start to rise from historical lows, the liquidity necessary to drive demand by business in a weak selling environment will cause problems. Short term this might cause a bounce and this bounce might be fed by money from tax related retirement deposits. The last few years April has started a sell off in anticipation of the summer doldrums. Given that this is the case I wonder if the institution start buying in a large way before September. It also important to remember that this year, there were very few disruptive technologies that were introduced at CES. Most products were variation to make existing products cheaper, better or faster.] |
