Stocks Flat to Up, Market on Fed Watch
biz.yahoo.com
By Elizabeth Lazarowitz
NEW YORK (Reuters) - Stocks are expected to drift a touch higher this week as Wall Street puts an uninspiring earnings season behind it and focuses instead on the promise that low interest rates will help spur the budding economic recovery.
The Federal Reserve is set to deliver its decision on interest rates on Tuesday, and a string of weak economic data in recent weeks has helped assure that it will be in no hurry to lift interest rates from current 40-year lows.
That may ease some of the pain of an earnings period that disappointed many investors looking for clear signs that profits are on the road to recovery. But it will also come as little surprise, leaving the market to drift sideways.
Investors also have a slew of concerns that will keep the market under pressure, including questions about the strength of the economic recovery, persistent doubts about the credibility of Corporate America's accounting and worries about unrest in the Middle East.
"The market is in a bit of a holding pattern," said Gail Seneca, chief investment officer of Seneca Capital Management, which oversees $15 billion. "The tug of war continues between improving economic and profit news and overhanging negative sentiment on everything from the integrity of numbers to geopolitical problems -- you name it."
Earnings reports are expected from a handful of key companies next week, including computer networking giant Cisco Systems (NasdaqNM:CSCO - news), life insurer MetLife Inc. (NYSE:MET - news), CVS Corp. (NYSE:CVS - news), the second-largest U.S. drugstore chain, and oilfield services firm Halliburton Co. (NYSE:HAL - news)
With the flow of corporate earnings reports set to slow to a trickle, investors will increasingly focus on economic data, like next week's reports on productivity and producer prices for clues to the economy's health.
"What we see unfolding, I think, is largely a continued expansion with not quite the robustness that people want to see," said John Davidson, president and chief executive of PartnerRe Asset Management, which oversees $4 billion. "The stock market seems to be bumping up against the ceiling of valuation and maybe credibility as well."
PROFIT OUTLOOK STILL MURKY
While a majority of companies have been meeting or beating earnings expectations, Corporate America's outlook for future profits remains murky, and that has put investors on guard.
"There wasn't enough in the way of positive forward-looking statements," said Benjamin Pace, managing director at Deutsche Bank Private Banking. "Based on how well the market performed in late 2001 and early 2002, there were obviously expectations built in that we would show clear signs of earnings growth, so that was somewhat disappointing."
Well over three-quarters of the companies in the Standard & Poor's 500 have reported their earnings so far. And of those, 60 percent have exceeded forecasts, 24 percent have met them, and 16 percent have fallen short, according to Thomson Financial/First Call.
These companies have beaten analysts' estimates by an average of 2.7 percent, surpassing the 2 percent average gain eked out since 1990, Thomson Financial said.
That has come as little comfort to investors who were hoping for upbeat earnings news and are instead faced with a train wreck in the telecommunications sector, as jitters about profits and heavy debt loads bring shares of former Wall Street favorites like WorldCom (NasdaqNM:WCOM - news) to their knees.
"It's not a huge part of the market, but it is certainly causing huge headlines, and deservedly so," Seneca said. "It's hard to watch companies like WorldCom, which were 'darling' companies, with these kinds of spectacular declines."
Stocks stabilized this week after major market gauges posted their worst weekly declines since the sharp selloff in the wake of the devastating Sept. 11 attacks on the United States. But the market's performance has hardly been stellar.
This week, the Standard & Poor's 500 index (^ - news) dipped 0.3 percent, the blue-chip Dow Jones industrial average (^ - news) rose 1 percent, and the Nasdaq Composite Index (^ - news) fell 3 percent.
FED SEEN ON HOLD
The Fed is expected to leave its benchmark federal funds rate unchanged at 1.75 percent next Tuesday, and a growing number of Wall Street dealers think the central bank will hold off at its June meeting, as well.
Out of 21 top Wall Street bond dealers, only one sees a hike at the June meeting, and nearly-three quarters of them expect the first hike to happen in August, according to a Reuters poll.
But investors will be listening carefully to the Fed's accompanying statement for hints about what its future rate plans are. Any indication that a rate hike is coming sooner that expected would send the market into a nosedive, analysts said.
The Fed cut rates 11 times last year, slashing short-term interest rates to 40-year lows in a effort to salvage the crumbling U.S. economy.
The economy grew at a shockingly strong annual pace of 5.8 percent in the first quarter of this year. But the April unemployment rate's surge to 6 percent, its highest level in more than 7-1/2 years, has cast doubt on the sustainability of the rebound.
While the Fed meeting will take center stage, economic data could help give Wall Street something to hang its hat on. Productivity data, due on Tuesday, is expected to show a gain of 6.9 percent in the first quarter of this year, according to economists in a Reuters survey. Unit labor costs are expected to show a decline of 3.5 percent.
"A lot of what we're seeing just shows that we're going to have economic growth that's not inflationary, and that's usually a good recipe for stock prices moving up," Pace said. Data on wholesale inventories, also due on Tuesday, are expected to show a drop of 0.3 percent in March.
On Thursday afternoon, investors also will take a look at the minutes of the Fed's March 19 meeting for more clues on the central bank's take on the state of the U.S. economy.
Investors also will eye the U.S. Producer Price Index on Friday, watching for any signs of inflation. The overall PPI is expected to show a gain of 0.4 percent in April, following a 1 percent rise in March. Core PPI, excluding volatile food and energy prices, is expected to show a gain of 0.2 percent after a 0.1 percent rise in March. |
