Fed Meeting May Leave Stocks Cold
Aug 19 3:20pm ET
By Elizabeth Lazarowitz
NEW YORK (Reuters) - The Fed is expected to lower key interest rates by a quarter of a percentage point at its policy-setting meeting on Tuesday, a move already anticipated by the markets so it will likely provide a short-term pop at best, analysts said.
"We've had so many cuts, that to get a sustainable boost, we're going to need real, tangible evidence that things in fact are strengthening," said Henry Herrmann, chief investment officer at Waddell & Reed, which manages $35 billion in assets.
Investors need to see solid signs the U.S. economy and corporate profits are set to emerge from their slump, like an acceleration in retail sales or a pickup in corporate capital expenditures, Herrmann said.
The flood of second-quarter earnings reports has subsided, but a slew of retailers will be on Wall Street's radar. Sector heavyweights Kmart Corp. and Target Corp. are scheduled to issue their corporate scorecards, along with Lowe's Cos. Inc. , Toys R Us Inc. , Intimate Brands Inc. and Saks Inc. .
In the high-tech sector, network testing equipment maker Agilent Technologies Inc. and medical technology company Medtronic Inc. are set to report.
Another fear for investors: the weakening U.S. dollar. It could be a thorn in Wall Street's side after slumping to multimonth lows against major currencies last week amid growing fears the U.S. economy's road to recovery may be longer than anticipated.
"Foreigners own a substantial amount of our securities, and if the dollar starts to weaken, they're going to worry about depreciation of value, and they're going to sell to try to avoid that," Herrmann said. "Or ... they may start to withdraw from additional purchases, both of which put pressure on our equity and fixed-income markets."
Apart from the Fed's policy-setting meeting, the economic calendar will be light. Wall Street will watch for the minutes of the Fed's July meeting, set for release on Thursday.
The government is expected to report July data on durable goods at the end of the week. In June, orders for big-ticket items, like refrigerators and washing machines, slid 1.7 percent, dashing hopes for a rebound in the hard-hit factory sector.
EXPECT MODEST RATE CUT
A poll of 25 primary dealers of U.S. government securities last Thursday showed they unanimously expect the Federal Open Market Committee to cut the key federal funds rate by another 25 basis points on Tuesday.
They were split, however, on whether there would be more rate cuts by the end of the year, with 13 predicting no further cuts, and 12 expecting at least another quarter point by the end of the year.
The Fed has slashed interest rates six times so far this year, bringing its key federal funds rate on overnight bank lending down to 3.75 percent in an effort to jump-start stalled U.S. economic growth.
Retreating inflation has paved the way for further cuts by the Fed, which generally lowers rates to keep the economy from overheating and to contain price gains.
As always, investors will watch for any hints Fed Chairman Alan Greenspan gives about the economy and the potential for further rate cuts.
"I think that the market will get a little pop from it -- not so much from a cut, but because Greenspan will be careful about promising more if it's necessary," said Milton Ezrati, senior economic strategist at Lord Abbett & Co.
Few expect a more aggressive half-percentage-point cut this time around, and analysts said even such an aggressive move might not be a sure cure for Wall Street's blues.
"There could be two interpretations of that," said Michelle Clayman, chief investment officer at New Amsterdam Partners, which oversees $1.1 billion in assets. "One is, 'Gee, the Fed really wants to kick start the economy.' The other thing might be, 'Ooh are things worse than expected?"'
EARNINGS WOES
Renewed worries about the deterioration in corporate profits pummeled the stock market last week as bleak financial forecasts continued to stream in, highlighted by warnings from automobile giant Ford Motor Co. and Dell Computer Corp. .
Technology stocks led the retreat, as the tech-heavy Nasdaq composite index <.IXIC> tumbled through a key technical support at 1,950 to end the week down 4.6 percent to 1,867.01. The blue-chip Dow Jones industrial average <.DJI> fell 1.7 percent to end at 10,240.78, and the broader Standard & Poor's 500 index <.SPX> dropped 2.4 percent to 1,161,97.
As of Friday, Wall Street analysts expected earnings of the companies in the S&P 500 to shrink 13.4 percent in the third quarter and fall 1.1 percent in the fourth quarter, according to research firm Thomson Financial/First Call. That's a far cry from the 6.3 percent drop in the third quarter and the 5.5 percent gain in the fourth quarter that was forecast at the start of July.
A drop in the fourth quarter would mark the first time since the nation's last recession in 1991 that corporate profits have been flat or lower for four straight quarters.
With the number of third-quarter profit warnings -- now totaling 326 -- approaching the record set in the first quarter of 2001, the picture could get uglier, said Chuck Hill, First Call's director of research. "We're probably going to see continued slashing of the third and fourth quarter estimates for at least a little while yet."
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