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ARE WE BALANCING on the knife-edge of recession?
Certainly, most economic indicators are signaling a
slowdown. Thursday's employment report showed that
hiring has slowed, while wages grew less than expected,
says Doug Schindewolf, senior economist at Salomon Smith
Barney. Whither the stock market?
Well, its direction depends upon two things. Interest rates
and earnings. After all, it was Alan Greenspan's two rate
cuts last month that got the market climbing again. But the
Federal Reserve Open Market Committee doesn't meet
again until Nov. 17, and Greenspan is giving few clues about
what he'll do.
That leaves earnings. Most companies have already reported
their third-quarter numbers. (Though PC maker Dell
Computer (DELL) and PC retailer CompUSA (CPU) will
report this week.) As for the fourth quarter, analysts have
greatly slashed earnings estimates for companies in cyclical
industries like forest products, oil, capital equipment,
railroads, airlines and financial services. In fact, according to
First Call, analysts expect earnings growth of just 3.4% for
the S&P 500 in 1998.
But when it comes to 1999, their outlook is still sanguine.
Unreasonably so. Wall Street analysts expect S&P 500
earnings to jump a whopping 18.7% in 1999, according to
First Call. Obviously, with the economy puffing along at 2%
growth or less, those estimates will need to be revised. In
fact, economists at Salomon Smith Barney recently wrote
that they expect 1998 S&P 500 earnings to rise just 0.3%
and to decline 2% in 1999.
So what will happen when Wall Street analysts begin
slashing their 1999 earnings estimates? We shudder to think.
But it could mean an end to the rally that has sent the S&P
500 up 15% and the Russell 2000 up 19% in the past
month.
Looking ahead to next week's earnings reports, investors
will most likely see another stellar quarter from Dell
Computer after the market close Thursday. CompUSA is
scheduled to report fiscal first-quarter earnings before the
market opens Tuesday. But don't take these increases and
apply them elsewhere.
Next week's economic calendar is light. LJR Redbook
reports weekly retail sales on Tuesday. Three reports that
bear watching are released Friday. The Department of
Commerce's retail sales and the Bureau of Labor Statistics'
producer price index are expected to show weakness in the
month of October. Also on Friday, the University of
Michigan releases its preliminary reading on consumer
sentiment for November. The Treasury market will be
closed Wednesday for Veteran's Day.
-- By Karyn McCormack
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