Coming Week: Don't Expect Fireworks
Michael Gannon
07/04/08 - 08:33 AM EDT
A fierce growl emanating from Wall Street likely will drown out the July Fourth fireworks for investors this weekend.
At the onset of the third quarter, the
Dow Jones Industrial Average and
Nasdaq Composite index entered bear market territory for the first time since 2003 on Wednesday.
That milestone is the culmination of a now nearly year-long credit crunch that has choked markets since last summer. It has stifled the once red-hot M&A market, and that, along with soaring costs for energy and raw materials, has sent equities into a tailspin that shows little sign of abating.
Now, with the second-quarter earnings season set to kick off in earnest Tuesday, with
Alcoa's(AA) report after the bell, investors are left wondering when the carnage might end.
"I think the expectations are pretty low," says Art Hogan, chief market strategist for Jefferies & Co. "I don't think anyone expects much upside guidance from corporate America."
Tradition defines a bear market as a decline in at least two major indices of 20% or more. At the close of Thursday's abbreviated trading session heading into the three-day Independence Day weekend, the Dow stood at 11,288.54, a 20.3% decline from the record close of 14,164.53 on Oct. 9. The Nasdaq closed at 2,245,38, a 21.5% decline from its 52-week high of 2,859.12 on Oct. 31.
The steep drops in the Dow and Nasdaq were not the only benchmarks achieved in the shortened holiday week. Crude oil prices soared to a new intraday record of $145.85 a barrel Thursday, before light, sweet crude for August delivery closed at a record $145.29.
Despite the swoon in equities, the economy so far appears to have been able to avoid a recession. Propped up by the federal government's stimulus checks approved by Congress earlier this year, real GDP grew 1% in the first quarter, the second straight quarter of sluggish growth, according to the federal government's final revision of the number last month.
Still, high fuel prices mitigated the stimulus package's impact. Treasury Secretary Henry Paulson said Thursday that high crude prices likely would prolong the economic slowdown.
Some economists and lawmakers are considering another round of stimulus, with alternatives ranging from a new set of checks to some sort of investment in infrastructure,
The Wall Street Journal reported Thursday.
Whether government does or does not act may not matter, says Nigel Gault, chief U.S. economist for Global Insight. He points out that the annual impact on consumers from the rise in gasoline prices from $3 to $4 a gallon roughly equals the amount taxpayers are receiving in their stimulus checks.
Only time is likely to improve the country's economic woes, Gault says. "I don't think the government has magic wands that they can wave to make things better," he says.
Sluggish growth and inflationary pressures have complicated efforts by government officials and the
Federal Reserve to spur the economy. The Fed has cut its key interest rate target 325 basis points over the past year but paused at the last meeting of the Federal Open Markets Committee.
While raising rates would dampen inflation by strengthening the dollar, the Fed also must contend with the still-slow growth and six straight months of job losses in the U.S. economy, including the 62,000 drop in nonfarm payrolls reported by the Labor Department on Thursday.
Aside from Alcoa and fellow Dow component
General Electric(GE), which reports its second-quarter results on Friday, next week's earnings calendar is light. GE in April lowered its 2009 earnings outlook from $2.42 a share to between $2.20 and $2.30 a share.
The run-up in oil prices has hit any number of companies. Airlines could lose $6.5 billion this year, Calyon Securities's Ray Neidl said in a research note Thursday. And perhaps no businesses have been more impacted by the record crude prices than Detroit's
Ford(F) and
General Motors(GM), which have been forced to alter their product line-ups and production schedules to meet consumers' demands for better fuel efficiency.
GM took a particularly brutal beating last week, as a Merrill Lynch analyst said a bankruptcy filing was "not impossible" if the market continued to deteriorate. The stock plunged below $10 for the first time in more than 54 years Wednesday in response, and investors will surely be monitoring that situation coming out of the long weekend.
"Clearly they have very big problems," Gault says.
Expect bearish analyst outlooks for the financial sector to continue to roll out ahead of a run of earnings reports from banks in the week of July 14.
Merrill Lynch(MER) reports July 17 and
Citigroup(C) reports July 18, and both banks have been subject to numerous predictions of writedowns and losses tied to their exposure to downgraded bond insurers
MBIA(MBI) and
Ambac Financial(ABK).
On Thursday, Paulson and Fed Chairman Ben Bernanke will testify before the House Financial Services Committee on a proposed overhaul of markets regulation. Paulson continued to push the cause last Wednesday, saying the near collapse of Bear Stearns in March, when it was bought in a fire sale by
JPMorgan Chase(JPM) with help from the Fed, stressed the importance of moving quickly to address the failure of a major investment bank.
The week ahead is not heavy on meaningful economic data, but there are a few data points people will be watching.
Pending home sales are reported Tuesday, and Gault says he is interested to see if last month's gains can continue, which would be a positive signal for the economy.
On Thursday, he notes, June chain-store sales will provide an interesting companion to the preliminary reading of the University of Michigan Consumer Sentiment Index. With consumer confidence dropping, chain-store sales could provide clues as to whether consumers are still spending their stimulus checks, he says.
