If GDP is revised to significantly lower than 1.5, market may sell-off. Revision due before market open on Friday.
Sideways to Higher; GDP Revision Looms
May 20 2:58pm ET
By Haitham Haddadin
NEW YORK (Reuters) - Wall Street expects a flat to slightly higher stock market early this week, but a crucial revision of government data on U.S. economic growth on Friday may spoil the party.
Early in the week, investors will take their cue from quarterly earnings from retailers and software companies, but barring big surprises the pundits mostly see the market taking a breather after a big run up in recent weeks.
"It will probably trade a bit sideways," said Richard Babson, president of Babson-United Investment Advisors Inc., which manages $1.8 billion.
The market has recovered from recent lows hit early this spring as investors scooped up stocks, betting that aggressive interest rate cuts by the U.S. Federal Reserve will spur economic activity later this year and filter through to corporate earnings, which are suffering.
"The only positive catalysts would be positive earnings announcements, if there are any," Babson said. "And the big negative or positive will be how big the GDP revision is."
Economists now expect Gross Domestic Product (GDP) -- the broadest measure of economic activity -- to show growth in the first quarter of 2001 of 1.5 percent, slower than the surprisingly strong 2 percent advance reading on April 27.
A revision to 1.5 percent is not expected to impact the market much. However, should the figures, scheduled to be released before the market opens on Friday, come in much weaker, then brace for a sell-off, the experts warn.
"The reaction would be, 'Oh God, things are really bad, we really are stepping into a recessionary rut,"' said Babson. "If the market doesn't like the figures and they fall below 1 percent I think the Dow will go below 11,000."
Also due on Friday is consumer confidence data for May from the University of Michigan.
BIT OF A BREATHER
The blue-chip Dow Jones Industrial average <.DJI>, which finished at 11,301.74 on Friday, is up more than 20 percent from the lows it hit in March. The technology-heavy Nasdaq Composite Index <.IXIC> finished last week at 2,198.88, up 34 percent from a two-year low it scraped early in April.
While the overall environment remains positive, a further advance may become more labored in the absence of key catalysts, analysts said.
"The indices may have to pause," said A.C. Moore, chief investment strategist at Dunvegan Associates in Santa Barbara, California. "Stocks will not be getting overbought probably for another three to five sessions."
The Dow broke above the key 11,000-point level last Wednesday, when it chalked up its highest close in eight months a day after the Fed cut rates by an aggressive 50 basis points. It was the fifth such move this year from the central bank, which is trying to boost the cooling economy by injecting liquidity.
Investors will tune in to speeches over the course of the week from Fed officials for any hints on the central bank's next move. The most notable will be Chairman Alan Greenspan's address on economic developments before an Economic Club of New York dinner, at 8:20 p.m. (0020 GMT) on Thursday.
BLEAK CORPORATE EARNS OFFSET BY FED EASING
Also on the plate will be a slew of quarterly earnings reports from high-tech companies that include software firms Agile Software , Computer Associates and VA Linux Systems on Tuesday, and ADC Telecoms , the telecom equipment maker, on Thursday.
Retailers reporting on Monday include Lowe's Cos and Toys R Us while Kohl's Corp. , Saks Inc. and Target Corp. hand in their cards on Tuesday. Book seller Barnes & Noble reports Thursday.
With the first quarter reporting period drawing to a close, investors already are looking ahead to the second quarter and beyond. While no recovery is seen yet, investors seem to believe the Fed is going to continue its monetary easing, which means the market will not be overly concerned about corporate results, argued Uri Landesman, chief investment officer with AFA Management Partners in Greenwich, Conn.
"Tons of money" on the sidelines is waiting to be put to work hint at an upward bias to the market, he said, but a strong consumer confidence number on Friday may spook investors.
"That may mean that the Fed thinks it does not have to do anything since they have already turned confidence with what they have done so far," Landesman added.
The University of Michigan issues its reading on consumer confidence for May at 10 a.m. (1400 GMT) on Friday. Economists expect a reading of 92.2, slightly lower than the 92.6 posted earlier, but a strong reading, however, could flag the Fed's easing could be nearing a close if Americans have a better outlook for the economy, he said.
Thursday brings weekly jobless claims data, or the number of Americans filing for unemployment benefits. This report has moved more into the spotlight recently after the numbers surged over the 400,000 mark, a level that was getting some market watchers worried about worsening unemployment as companies bit by the economic slump lay off workers.
Among other economic reports on Thursday are new-home sales for April, with last month's number forecast to be 975,000, down from 1,021,000 in the prior month. Data on existing homes for April is expected on Friday, with the numbers seen at 5.25 million vs. 5.44 million for the prior figure.
A wild card that could impact sentiment on Wall Street is earnings from a number of Japanese banks during the week.
While Corporate America's earnings are still dismal, especially for tech firms, Henry Herrmann, chief investment officer at Waddell & Reed, said the Fed's monetary easing guards against a big stock market slide.
"I think it's grudgingly up," Herrmann, whose firm manages about $4 billion, said of his outlook. "GDP is going to be revised down and the market knows that and is looking forward not backward. So unless there is some bizarre (consumer) sentiment number, I would suspect a relatively quiet week." |
