Attacks, Earnings to Depress the Market
Sunday October 7, 6:29 pm Eastern Time
"Analysts now forecast third-quarter profits will fall an average of 21.3 percent from the same period a year ago, according to Thomson Financial/First Call. That's the worst performance since the second quarter of 1991.
It gets worse. Currently, analysts expect full-year profits to be down 13.8 percent. But First Call strategists say those analysts' forecasts will probably come down about 3 percentage points more, making 2001 the worst year since at least 1969. "
By Denise Duclaux and Chelsea Emery
NEW YORK (Reuters) - Wall Street is expected to sag this week as Sunday's military strikes against Afghanistan churn up investor anxiety at the start of the worst corporate earnings season in a decade.
``We are in uncharted waters in the world of warfare,'' said Hugh Johnson,
chief investment officer at First Albany Corp.. ''That alone will create
uncertainty and some buyers will back away from the market.''
The United States on Sunday began the first leg of what it has said will be
a protracted and wide-ranging war against terrorism and the countries that
support it. Few investors were caught off guard as the reports of strikes
against targets of the Taliban regime in Afghanistan surfaced on Sunday,
but the added apprehension may be enough to snap a two-week rally in
the markets.
``Everyone understood this was coming, but it's still a negative shock at a
time when the market needs a positive shock,'' said Christian Stracke,
chief Latin American debt strategist at Commerzbank Securities.
Stocks, which tumbled to three-year lows following last month's assaults, had been crawling back on hopes for added stimulus
from the Federal Reserve and the U.S. government. But the first phase of warfare, coupled with a bleak quarterly earnings
season and a looming economic recession, is expected to put any market recovery on hold.
A handful of Wall Street strategists, however, say the reprisals for the Sept. 11 attacks, could spur a short-term patriotic rally of sorts. They draw similarities with the stocks rally that coincided with the 1991 U.S. military actions to force Iraq out of Kuwait.
``When the stock market opens on Monday, we might actually see a relief rally as we had in 1991,'' said Wells Fargo chief economist Sung Won Sohn.
WAR SCARES INVESTORS
Sunday's attacks on Afghanistan had been under preparation since air assaults leveled the twin skyscrapers of New York's
World Trade Center and damaged the Pentagon near Washington, killing around 5,600 people.
``It is not such a shockingly unexpected event that it will put markets into disarray, but how it unfolds over the next few days will be key,'' said Anthony Karydakis, senior financial economist at Banc One Capital Markets Inc. ``If it looks as if things are not wrapped up quickly, then you start to get all sorts of scenarios to worry about.''
The United States blamed Saudi-born militant Osama bin Laden and his al Qaeda network for the attacks and has accused Afghanistan's Taliban rulers of shielding him. Bush on Sunday vowed a ``relentless'' campaign against terror.
``I think markets typically get skittish around whenever these actions take place ... Under these circumstances, when there is uncertainty like this, people go to the safer havens and that's fixed-income assets,'' said Joel Naroff at Naroff Economic Advisers.
In the first week of trading after the Sept. 11 attacks, blue chip stocks posted their worst week since the Great Depression. Two weeks after the attack on Pearl Harbor in 1941, the Dow was down just 6.6 percent. When North Korea sent troops across the 38th parallel in 1950, the Dow fell just 7 percent in two weeks.
The previous periods marked beginnings of economic booms, whereas now the economy already was barely above a stall, despite a slew of rate cuts by the Federal Reserve and a tax cut from the federal government. Investors worry that the cost of fighting terrorism and the attack's impact on consumer confidence will push the economy into a recession.
The near-term outlook for corporate profits and the economy appears bleak enough to spook investors, but some strategists say any dip in the market could represent a good buying opportunity. Although a recession is widely expected, the Federal Reserve's nine interest-rate cuts this year as well as President Bush's proposal for a fat stimulus package are widely expected to
boost the economy by 2002.
``I think this a buying opportunity in general,'' said Milton Ezrati, senior economic strategist at Lord Abbett & Co, which oversees about $40 billion. ``The caveat is that the situation does not get out of control, but barring that the fundamentals are if anything better than they were.''
EARNINGS, ANOTHER ROADBLOCK
This week marks the beginning of the third-quarter earnings season, when companies report financial results and hint at what is to come later in the year. The reports are expected to show the sagging U.S. economy, as well as slower consumer and capital spending, slammed profits in the third quarter -- and could shed light on factors that may continue to weigh into next year.
Analysts now forecast third-quarter profits will fall an average of 21.3 percent from the same period a year ago, according to Thomson Financial/First Call. That's the worst performance since the second quarter of 1991.
It gets worse. Currently, analysts expect full-year profits to be down 13.8 percent. But First Call strategists say those analysts' forecasts will probably come down about 3 percentage points more, making 2001 the worst year since at least 1969.
``Earnings are going to be lower than the consensus estimates and that means there's still a downside risk to stocks,'' said Nick Sargen, global market strategist for J.P. Morgan Private Bank, which oversees $300 billion. He's telling clients to move 5 percent to 10 percent of their equity holdings to high-quality bonds. ``We believe there will be a recovery next year. But it's too
early to jump over the abyss right now.''
Also, money managers say they will likely lock in profits by selling stocks that have gained over the past two weeks as they worry about recent jobless reports.
``We've had a decent rally here. Will it continue over next week? I doubt it,'' said Gil Knight, a small-cap stock fund manager for Allied Investment Advisors, which oversees $12 billion. ``Announcements of massive layoffs will eventually make people more cautious about spending.''
Bond markets will be closed on Monday for the Columbus Day holiday. But U.S. stock exchanges will be open regular hours.
A DELUGE OF ECONOMIC DATA
Friday will bring a slew of economic data, which may help illuminate a cloudy outlook.
September retail sales and the University of Michigan's preliminary survey of consumer sentiment are expected to give a sign of whether consumer spending, which props up about two-thirds of the U.S. economy, is holding up. The Producer Price Index (PPI) is also expected, but investors said the inflation indicator will take a back seat.
Last week, stocks rose as investors snapped up battered shares after they fell to three-year lows following the Sept. 11 attacks. Stocks gained on Friday after President Bush proposed a tax-relief program of at least $60 billion to help the economy recover.
For the week, the Nasdaq composite index was up 7.1 percent, while the S&P 500 gained 2.9 percent. The Dow Jones Industrial average rose 3.1 percent.
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