Stocks Seen Flat to Lower in Busy Week
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Sunday, September 22, 2002
NEW YORK — Wall Street walks a tightrope next week as investors focus on Tuesday's Federal Reserve policy meeting while deciphering economic tea leaves and bracing for more corporate warnings.
"It's been pretty bad and there are probably more bombshells out there," said David Memmott, head of listed block trading for Morgan Stanley.
"The biggest thing on people's minds is third-quarter earnings. We're waiting for a turn in earnings or the economy. Preannouncements have been very negative," he said.
Companies including computer services company Electronic Data Systems Corp. and financial giant J.P. Morgan Chase & Co. Inc. rattled investors with dire profit warnings this week. Now some market gauges. like the tech-laden Nasdaq Composite, hover dangerously close to five-year lows hit in July or August.
And investors expect more bad news. The earnings warning season next week moves into high gear as many companies confess that their third-quarter earnings will land shy of analysts' consensus estimates.
Analysts expect third-quarter earnings at companies in the Standard & Poor's 500 to rise 8.5 percent from the year-ago period, according to market researcher Thomson First Call. That's down from expectations of 10.9 percent growth just one week ago and 16.6 percent growth at the start of the quarter.
Thrown into the bearish mix overhanging stocks is the Iraq wildcard: Investors will tune in to developments in the war of words between Washington and Baghdad, and the uncertainty will keep many traders trigger-happy to sell.
Profit jitters and fears about the cost of a possible war with Iraq sent the blue-chip Dow Jones industrial average below the 8,000 level this week.
"The two issues -- Iraq and earnings -- have to be cleared and resolved," said Stanley Nabi, managing director at Credit Suisse Asset Management, which oversees about $269 million globally. "I don't think the market will be much up or much down by the end of next week."
Recent economic data has painted a mixed view of the world's largest economy, and the Street will seek more cues on where it's headed from this week's hefty helping of reports.
The start of the week brings the August index of leading economic indicators, a key gauge of economic activity.
The final reading on economic growth in the second quarter of 2002 is due Friday.
Also on the calendar next week is data on consumer confidence, which is closely for clues about spending by the consumer, the main engine of growth for the economy.
Multi-Year Lows
Stocks Friday eked out closing gains but posted their fourth down week in a row.
The Dow average fell 3.9 percent, the Nasdaq slid 5.4 percent and the broad S&P 500 dropped 5 percent for the week. Nasdaq, at 1,221.09, is near a five-year low of 1,192.42 reached July 24 when stocks were slammed by worries over earnings, corporate accounting scandals and jitters over geopolitical stability.
"Awful market to even try and predict," said Anthony Iuliano, head equity trader for Glenmede Trust Co.
"I'm hearing a lot of pessimism (in the short term). There's uncertainty with the Iraq situation and people don't like the uncertainty." Still, Iuliano said, "Stocks are really underpriced at this point."
Wall Street is unanimous in expecting no change in policy from the Federal Reserve next week.
Not one of the 22 primary dealers who trade directly with the Fed think the U.S. central bank will alter interest rates at its Tuesday policy meeting. But analysts think the Fed will keep its risk assessment weighted toward economic weakness, reflecting the uneven nature of the recovery.
At its August meeting, the Fed left interest rates unchanged but warned of economic weakness, spurring a sell-off in the stock market. The bank has sent rates to 40-year lows with a series of 11 rate cuts last year to boost the economy.
Warning Season Hits Its Stride
A few companies report ahead of the earnings rush next month, such as investment bank Goldman Sachs and Lehman Brothers as well as chipmaker Micron Technology .
Meanwhile the early trickle of profit warnings, ahead of the actual earnings season, is bucking a trend that began in the fourth quarter of 2001, when more companies offered positive outlooks and fewer offered negative ones, according to First Call.
The ratio between those two kept improving into the second quarter of 2002, but the trend is starting to reverse.
Out of 874 preannouncements so far this quarter, 457 companies have released negative outlooks, 208 have been on target and 209 companies had positive forecasts.
"We are going to have some hurdles next week like economic news and earnings news that we are going to have to try and get through," said Charles White, president of Avatar Associates.
"We are getting to a point where the economy is turning, but people are cynical because allegedly it's been turning for a year and a half now," said White, who oversees $2 billion.
The Conference Board, a private research firm, issues the index of leading economic indicators for August, a key gauge of economic activity, half an hour after Monday's open, at 10 a.m. .
The report is expected to show a decline of 0.10 percent vs. a fall of 0.4 percent in July.
Wall Street gets two reports on the housing sector mid-week: Wednesday's existing homes figures for August, seen edging up 5.40 million from 5.33 million, and Thursday's new homes sales for last month, seen falling to 981,000 from 1.017 million. The numbers are due after the open on both days.
Durable goods orders, another important report, for August will be released Thursday and was seen falling 2.6 percent, from a rise at July's blistering rate of 9.2 percent.
Friday's final reading on economic growth as measured by Gross Domestic Product, due at 8:30 a.m., is expected to show a rise of 1.2 percent vs. a previous reading of 1.1 percent.
Shortly after the open that day, investors get the final September consumer sentiment numbers from the University of Michigan, and Tuesday September consumer confidence data will be released 30 minutes after the market open.
"Consumer confidence is the big one, and they (consumers) are the wild card here. If they walk away, we're in big trouble," Iuliano said. "The Fed comes next week. I don't expect anything out of that -- it is not going to do anything. The Fed has to keep some ammo for later." |
