Where's the correction?
With markets back near their highs,
investors will be looking for more gains
By Staff Writer M. Corey Goldman
March 26, 2000: 11:35 a.m. ET
NEW YORK (CNNfn) - Correction? What correction?
That will be the unanswered -- and unspoken -- question on Wall Street this
week as investors reconvene for a week that is widely expected to see stocks
continue their climb out of the doldrums into record territory.
At the same time, a host of economic reports could potentially rain on Wall
Street's parade with more evidence of strong economic growth -- evidence that
would reinforce expectations of accelerating inflation and more interest rate
increases from the Federal Reserve.
"We have a few economic numbers coming up that will probably shed some
more light on just how strong the U.S.
economy is," said Doug Porter, a senior
economist with Nesbitt Burns Inc. "The
perception is that nothing is slowing the
economy down yet, especially with the markets going the way they are."
Wall Street thumbed its nose at the almighty Fed last week after it raised
short-term interest rates by another quarter point to 6 percent -- the fifth
increase in six months. The Dow rallied more than 517 points last week in the
wake of the rate decision, its third-biggest weekly point gain ever, while the
tech-heavy Nasdaq gained finished off the week just shy of its all-time high. The
S&P 500 index also managed to end the week at a record.
Nasdaq near all-time high
On Friday, the Nasdaq gained 23 points, or about 0.5 percent, closing at
4963.55. Earlier in the session the index touched an intraday high that topped
the 5,048.62 record close set March 10. The Nasdaq has now recouped the
near 10 percent decline it posted earlier in the month. The S&P 500 gained
less than 1 point, closing at 1527.46, its fourth record this year.
The Dow posted a mild loss Friday, declining about 7 points, to 11112.72
The blue chip index is now almost even for the year -- a significant achievement
considering the gut-wrenching 13-percent-plus drop it took earlier in the quarter.
Wall Street considers a market decline of 10 percent or more an official
correction.
Bonds also lost ground Friday on renewed concern about rising rates -- in
particular, that the Fed may raise its
benchmark fed funds rate another
quarter point before its next policy
meeting or raise the key rate a half point
at the May 16th meeting. For the week,
the 10-year note rose about 1/2 a point
in price, while its yield declined to 5.97
percent -- the first time it's dipped below
the Fed's overnight lending target in
more than 10 years. The fed funds target
currently stands at 6 percent.
Treasuries rallied earlier in the week after the Clinton administration said it
would back legislation to reduce government support of the nation's largest
mortgage lenders, sending investors into the safety of government debt. That
prompted investors to sell agency bonds such as Freddie Mac and Fannie Mae
and buy government notes and bonds.
The big question for investors in both markets going forward is whether the
Fed's spate of rate increases will begin to slow the torrid pace of the U.S.
economy and keep inflation from accelerating -- even though inflation has yet to
rear its head to anyone on Wall Street or in Washington.
Where's the inflation?
So what's behind all the optimism in stocks? For one, inflation, with the
exception of oil prices, still remains benign. Excluding volatile food and energy
costs, prices rose a tame 0.2 percent last month. For another, market
participants generally expect the Fed's five rate rises will work to slow the
economy, ensuring inflation remains at bay down the road.
"At the moment there is not a broad-based systemic inflation problem
bubbling up in the economy," said Joseph McAlinden, chief investment officer
with Morgan Stanley Dean Witter Funds. "The Fed as a precaution has raised
rates a little bit, will raise rates a little bit more but I don't think they are going
to do a whole lot more after that."
What's more, corporate earnings are expected to come up pretty rosy in the
latest quarter. The companies that
comprise the S&P 500 Index are
expected to post earnings 21
percent higher than a year ago,
according to earnings tracker First
Call. That compares to a 21.6
percent advance in the fourth
quarter and a 22.7 percent gain in
the third quarter.
And it's possible earnings growth will surpass even the forecast numbers,
said Chuck Hill, a senior research analyst with the Boston-based firm. "We
really thought growth would taper off heading into 2000 and it hasn't," he said.
"It isn't going to be earnings that pricks the stock market bubble."
A few good earnings
Earnings season, as it's informally referred to on Wall Street, is the period
when companies begin releasing details about their quarterly financial
performances to the public. Companies will begin to unveil their first quarter
results beginning around the second week of April.
For this week only a few companies will be reporting -- Walgreen Co. (WAG:
Research, Estimates), Bed Bath and Beyond Inc. (BBBY: Research,
Estimates) and Cabletron Systems (CS: Research, Estimates).
More immediate on the radar screen are this week's economic releases. On
Monday, the National Association of Realtors will report February's existing
home sales figures, on Tuesday the Conference Board will release its March
tally of consumer confidence and on Wednesday, the Commerce Department
will release February's new home sales.
The headline grabber of the week will likely come Thursday when Commerce
releases its final tally on fourth quarter GDP. The U.S. economy expanded at a
whopping 6.9 percent pace in the fourth quarter. Analysts polled by
Briefing.com anticipate the final total probably stayed the same. Even so, some
economists including Nesbitt Burns' Porter expect the number could sneak up
above the 7-percent mark.
OPEC meeting awaited
To be sure, oil will be big on the agenda this week as members of the
Organization of Petroleum Exporting Countries (OPEC) meet in Vienna to
discuss whether to raise production to boost the amount of world supply and
allow prices to fall. Crude oil futures on the New York Mercantile Exchange
(NYMEX) finished off the week around $28 a barrel
Oil markets are expecting OPEC producers and their ally Mexico to raise
production levels at next week's meeting. But the key question is how much
more they will unleash on the market without ruffling the feathers of OPEC price
hawks, who want a small increase to avoid flooding the market with too much
oil as seasonal demand begins to taper off.
Leading producers, including Saudi Arabia and Venezuela, are thought in
favor of raising OPEC supply by 1.5
million barrels per day, but Iran wants
a lower increase of less than 1 million
barrels per day. Algeria and Libya
want to defer any increase until after
the second quarter.
Among non-OPEC producers,
Mexico has signaled it will open up its
taps, but below the 325,000 barrels-per-day level it agreed to cut from its
exports under the production accords last year. A Mexican government official
said Friday his country would decide on an increase, but only "in coordination"
with other producers.
Norway, the second largest oil exporter after Saudi Arabia, said it would wait
until middle of next week to make its decision. Norway has said it has been
cutting 200,000 barrels per day from its production in compliance with the
producers' agreement. |
