Market Update: Stocks Lower as Fed-Focused Bulls Overpowered by Earnings-Focused Bears

Wall Street moped along glumly today, scuffing its sneakers along the sidewalk while muttering about another earnings warning. Some tried to focus on a future Fed cut and run stocks higher, but overall, the mood soured and investors couldn't get thoughts of a slowing economy out of their heads.

Both the Nasdaq Composite Index and Dow Jones Industrial Average were negative headed into the last couple hours of trading. The Dow was off by 43 points after earlier gains of more than 40 points. The Comp was off 29.

Major Indices INDEX CHANGE % VALUE Dow 47.17 -0.45% 10,540.42 S&P 500 6.01 -0.45% 1336.54 Nasdaq 32.71 -1.18% 2737.67 Russell 2000 0.19 -0.04% 487.90 TSC Internet 2.94 0.77% 383.41 NOTE CHANGE PRICE YIELD 10-Year Treasury 12/32 103 30/32 5.221% Market data as of: 2:12 p.m. EST, Jan. 22, 2001

Dell (DELL Quote) was the big news today, having warned that its fourth-quarter earnings will come in between 18 and 19 cents a share, lower than the 25 cents expected by the folks at First Call/Thomson Financial, which tracks analyst estimates for companies. Dell's warning was really no different than the ones issued by anyone else in tech. It cited the worldwide slowing in spending as a major factor behind the miss.

What made this release different is that, with the Fed meeting approaching, a half-basis point cut already on the books with the market standing knee-deep in earnings releases, Dell's warning raises the issue of a slowing economy. Markets were readdressing the situation. Is the worst being dealt with? Is it okay to inch back into tech? Or should these companies be punished for not showing growth and lowering expectations?

Today, both the Comp and Dow traded cautiously, first dipping on the news and then recovering as people tried not to overreact too much. But the fear that the economy was slowing crept in as the day wore along, replacing whatever joy there was over the likelihood of a big Fed cut.

Dell was last off 2.2% to $25.06, after fighting back into the green at one point this morning.

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Within the Dow, Dell's influence hurt IBM (IBM Quote), Microsoft (MSFT Quote) and Hewlett-Packard (HWP Quote) the most. Fitting, since all those guys would face a similar fate if worldwide information technology spending dries up until the affects of a Fed cut begin to be felt in the back half of this year. Intel (INTC Quote) and SBC Communications (SBC Quote) were also lower.

So, where's the money?

It headed back into manufacturing, retail and other nuts-and-bolts, bricks-and-mortar style areas of the economy. Despite the fact that it warned on Friday, Home Depot (HD Quote) was one of the Dow's biggest leaders. It was up 5.8% to $43.38. It seems that traders have a rather short memory. Headed into the weekend, the Depot said its results would fall short of both analyst estimates and the year-ago quarter because of cheaper-than-expected building materials and a shortfall in lumber.

Wal-Mart (WMT Quote) traded higher along with Home Depot and the rest of the S&P Retail Index, which rose 4.3%. Meanwhile manufacturers 3M (MMM Quote) and International Paper (IP Quote) tracked higher.

Overall, investors stayed out of technology, making a notable exception for the biotechnology stocks in the American Stock Exchange Biotechnology Index, which rose 5%. Other than that bright spot, boxmakers, telecommunications, large-cap tech and networkers were all lower.

Perhaps the only real saving grace is that many tech sectors were making only 2% moves to the downside. Despite the negative bent to the trading, the reaction has been relatively mild and gradual, inching lower as the session putters along. The news still isn't good and the economy is clearly slowing, but at the same time, people were keeping the panic under control, focusing on profit taking after the rally that followed the last Fed cut and hoping that the next one will be as good.

What's the Deal?

So how can people do this? How are markets able to recover from bad news, when just a month ago, this kind of thing would have sent stocks tumbling?

In December and November, the Federal Reserve was nowhere in sight, while the president-elect had yet to be decided, energy prices were skyrocketing and nearly everyone preannounced. Now, markets have seen that the Fed is willing to take action to fix the economy, have gotten used to the earnings warnings and energy problems and George W. Bush is in the Oval Office.

The Fed's the thing. Indices can shrug off a bad warning now that it see the Fed has plans for the interest rate and upbeat prognostications for the economy in the second half of next year.

Data out this morning, along with the whispering from Wall Street's analyst community, has fueled speculation that the Fed will cut interest rates by a half point when it meets at the end of this month. U.S. leading economic indicators, released by the Conference Board this morning, fell 0.6% in December to 108.3, vs. forecasts for a 0.3% drop.

The focus is on the future, not the present. And the major issue is what earnings will look like in the second half of next year. Already, 2001 growth expectations for the Nasdaq 100 have stumbled to 7.5% from 15.1% in a month, mostly due to declines in expectations about chip giant Intel(INTC Quote), according to Joseph Kalinowski, equity strategist at earnings tracker I/B/E/S. Growth expectations for the Standard & Poor's tech sector have similarly moved lower, falling to 5.5% from 13.6% a month ago.

A friendly Fed chairman Alan Greenspan and Federal Open Market Committee are now expected to cut interest rates by another half point when the group's policy making body meets on Jan. 30 and Jan. 31. In early January, fearing the economy was slowing too quickly, the Fed cut interest rates for the first time in a year and a half, dropping short-term rates a half point to 6%.

And as these hopes of another big Fed cut continue to grow, investors have been able to shake off some bad news from all over the place. Last week, Sun Microsystems (SUNW Quote) announced a lower growth outlook, while just this morning, Dell warned about its fourth quarter. Yet, since the Fed slashed rates early in the month, most tech names have done quite nicely.

"Market sentiment appears to be improving," said Lynn Reaser, chief economist and senior market strategist for Banc of America. "Investors are beginning to respond less adversely to negative news and more positively to good news."

Reaser said the Fed will most likely cut the rate by 25 or 50 basis points, with the large cut coming if the next few major economic data releases -- most notably Thursday's announcement of the fourth-quarter employment cost index and December existing home sales and Friday's release of durable goods orders for the last month of 2000 -- come in with bad numbers.

She also said that with George W. Bush in office, more Americans will reexamine the way they've invested -- choosing stock-based funds over money market funds, while seeking out a more-diverse portfolio than the shallow, silicon-based models from yesterday. Given recent movements, with money churning in and out of tech and back and forth from defensive stocks, it seems that investors are seeking out such a varied portfolio.

Merrill Lynch chief economist Bruce Steinberg agrees with Reaser, telling investors in a note this morning that the American economy is sluggish and not dead. He outright rejected the notion that the economy was plunging into a recession, allowing that although certain sectors have been hit rather hard, many are showing signs of resistance and even life.

Back up the truck. Steinberg thinks the Fed's gonna make the big move.

"We believe the mix of data is soft enough to justify another 50-basis-point cut by the Fed on January 31," he wrote.

Sector Watch

With Home Depot talking about cheaper-than-expected building materials costs and really, slowing spending in the home building area, some other related sectors were getting hit. Steel companies were down lower, with industry heavy Nucor (NUE Quote), dropping 3.9%.

In the past three weeks, steelmakers have come under a great deal of pressure as high inventories and slowing demand have virtually assured that steel will have a tough time going forward.

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Bonds/Economy

Treasuries are trading lower, especially among longer maturing securities. Traders have been shifting investments toward shorter-term notes in the hope of a half-percentage point cut in interest rates. Analysts are also awaiting Fed Chairman Alan Greenspan's address to the Senate Finance Committee later this week, in which he is very likely to hint of the Federal Reserve's current strategy and elaborate on critical economic issues. More data released this morning confirm the slowdown in the economy.

The benchmark 10-year Treasury note lately was down 12/32 to 103 30/32, raising its yield to 5.221%.

In economic news, the index of leading economic indicators (definition | chart | source ) fell 0.6% in December, compared with a 0.4% decrease in November. Analysts attributed the continued drop to a rise in company layoffs, declining consumer confidence and reduced working hours in the manufacturing sector.

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