We shall see if you are right. Either investors will ignore the bad earnings news coming out, the Shell write offs, and continue to buy, or they will become concerned and lock in their profits. So far, they are buyers.
More Hurdles Left In 1998 Wall Street Games
01:34 a.m. Dec 13, 1998 Eastern
By Pierre Belec
NEW YORK (Reuters) - Who would have ever imagined that this incredible stock market would be in such great shape after one of the most hair raising years ever?
But the market, which has been pumped up with the Federal Reserve's interest-rate steroids, will have to go over two more hurdles before the end of the year.
It will have to weather the earnings warnings season, an unsettling period for investors when companies raise the curtains on their results, and the next meeting of the Federal Reserve.
The earnings pre-announcements will provide few jolly times for Christmas.
So far seven of the 30 companies that make up the Dow Jones industrial average -- Sears Roebuck, Johnson & Johnson, Boeing Co., J.P. Morgan, Proctor & Gamble, Merck & Co., Coca-Cola Co. -- have said their fourth-quarter profits will be disappointing.
There will more nail biting in the days leading to the Dec. 22 meeting of the central bank's policy-setting Federal Open Market Committee.
Wall Street could turn frightful if the Fed decides to keep interest rates unchanged after three months of exuberant cuts in rates, the experts say.
The reason: Many investors believe that interest-rate cuts may be the only magic potion that will keep stocks from falling.
''The thing that has been driving the stock market has been a huge amount of liquidity and the belief that lower interest rates are the solution to every problem,'' said Bill Meehan, chief market analyst at Cantor Fitzgerald & Co.
It's become a case where earnings are bad but nobody really cares. Analysts say the earnings story in the quarter that ends Dec. 31 will be ugly as the recession that is zapping one third of the global economies eats further into the profits of multi-national companies.
Some are predicting negative year-on-year comparisons for this year's last quarter.
First Call, a Boston-based firm that tracks earnings estimates, says analysts expect the quarter's earnings to rise by only 4.8 percent, a dramatic reversal from the 19.1 percent gain that was predicted at the start of the year. The year ago earnings were up 8.5 percent.
Despite the gloomy outlook, stocks are still flying high, with the Dow Jones industrial average less than 600 points below its November record of 9,374.27. The Nasdaq market is even better shape after chalking up a series of record highs this week.
''It's incredible how investors' psychology has gone from near despair to euphoria in record time,'' said Meehan.
''In the last two months, the Standard & Poor's index has gone up some 60 percent and I've never seen anything like it,'' added Meehan, who has been tracking the market since the late '60s.
Analysts say stocks may be just as overblown as they were in late summer before the Dow went into a head-spinning drop of nearly 2,000 points, then regained all of the lost ground to set a new high last month.
Investors have cranked up the Dow over the last three months. The world's most closely watched stock gauge is now up 12 percent for the year after racing back from a late summer swoon that drove it down 5 percent.
''The problem that I have with this market is that the eroding earnings are going to spread and at some point in time, something will make people sit up and wonder about what they are paying for stocks,'' Meehan said.
''Right now, investors are chasing stocks out of fears of missing out on a run to 10,000 in the Dow and little thought is being spent on the market's valuation.''
What caused stocks to snap back?
Mainly, it was the Fed's timely move to show that it was doing its job, looking to head off any fallout from the economic meltdown overseas.
By cutting interest rates, the Fed flooded the nation's system with money to protect the economy from being dragged down by sick economies in Asia, Japan, Russia and Latin America.
The central bank also wanted to rebuild confidence in financial markets and to keep investors from panicking, which would have made it doubly difficult for the central bank to turn around.
The Fed got some help from the other global central bankers, which calmed the anxieties worldwide.
The bankers sent the message that they, too, are serious about keeping financial markets thriving.
Have the central banks created a dilemma for themselves? Analysts said the bankers may have provided a safety net for markets, relying on the fact that stocks have rarely gone to the dogs when interest rates were dropping.
The problem, however, is the banks won't be able to serve as shock absorbers forever.
Have things changed that much from a year ago when many economies started to implode?
U.S. corporate profits have been on a downward slope for the past year, and earnings growth is the lowest in eight years due to weak exports to economically ailing countries.
While the eroding earnings have dampened some investors' appetite for stocks, the market has been resilient because investors are looking over the valley and they see a recovery in corporate profits in six to 12 months.
Wall Street has also been able to explain away the market's strength by saying that, although the earnings have shrunk, they are still not all that bad.
And besides, the companies are having a tough time comparing this year's results with the record earnings of the last three years.
The scary part is that the fourth quarter can be the worst period for corporate earnings.
It's the final quarter in a big football game. The companies that have run out of time to make their glowing earnings estimates come true, throw their hands up in the air now that sales goals have been missed, and come out clean, unveiling expensive charges and other nasty things.
The moment of truth for the brave investors who have fueled the recent recovery may be just around the corner.
For the week, the Dow Jones industrial average was off 194.38 points at 8,821.76. The Nasdaq composite index was up 27.47 points to 2,029.31 and the Standard & Poor's 500 index lost 10.08 points at 1,166.46.
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