Aaron Task
SAN FRANCISCO -- Disjointed pretty much sums up the past week on Wall Street, as reflected by returns for the major averages. For the week, the Dow Jones Industrial Average rose 0.2% while the S&P 500 shed 1% and the Nasdaq Composite lost 1.9%.
Following Friday's tumble, you could throw disillusioning and disappointing into the mix to describe this week. On Monday, stocks rose with blue-chips moving significantly higher while techs enjoyed a tepid advance. The gains dissipated Tuesday, with growth names at the vanguard of the decline. Techs snapped back Wednesday with a big advance while blue-chips stumbled. On Thursday, growth and value stocks rose in tandem amid talk a new, sustainable rally phase had begun. But such chatter quickly evaporated following news Thursday night from Nortel (NT Quote - Cramer on NT - Stock Picks), Schering-Plough (SGP Quote - Cramer on SGP - Stock Picks), Dell (DELL Quote - Cramer on DELL - Stock Picks), and Hewlett-Packard (HWP Quote - Cramer on HWP - Stock Picks). Each company, joined by Corning (GLW Quote - Cramer on GLW - Stock Picks) Friday morning, reminded investors of the difficult environment for corporate profits and saw its shares summarily slammed. Stronger-than-expected reports on the Producer Price Index and housing starts Friday added to concerns about the fundamentals, leading to a broad selloff. A mid-afternoon spike in oil prices following reports of U.S. air strikes vs. Iraq didn't help, although major averages did close above their worst levels of the session. The Dow shed 0.8%, the S&P slid 1.9% and the Nasdaq tumbled 5% Friday as declining stocks bested advancers 19 to 11 in Big Board trading and by 13 to 5 in over-the-counter action. "Even [prospects for] a Fed ease is starting to lose its weight, there's so much bad news out there and confidence is so low," said Gregg Schreiber, vice president of institutional futures sales at Bear Stearns. "Whether the Fed lowers [interest rates] another 25 or 50 basis points is not going to really change the reality -- the stock market is dealing with all the bad news." Friday afternoon, Fed funds futures were pricing in a 70% chance of a 50-basis-point ease at the Federal Reserve's March 20 meeting but that's vs. a near certainty at the beginning of the week. Like Schreiber, the Fed funds market and most traders shrugged off the PPI numbers as an aberration. Indeed, Treasury bonds recovered from their post-PPI swoon to finish higher Friday after weak reports on consumer sentiment and industrial production/capacity utilization. Funds flowing from equities also aided fixed-income securities. The PPI number "was an exaggeration, but the point is we're building this in," countered Paul Karisel, chief economist at Northern Trust in Chicago. "We're gradually ratcheting up the inflation rate." Kasriel, who has long argued recession obsession overshadows the risk of inflation's return, believes higher energy prices and capacity constraints are going to limit economic growth going forward. But higher energy prices are filtering through to other aspects of the economy, such as food. That could lead to stagflation, he said, referring to the term coined in the 1970s to describe a period of weak economic growth and higher unemployment accompanied by higher prices. "It's not as bad as the 1970s, but we've got a lot of problems in this economy," the economist argued. "We're seeing a weaker economy, some increase in unemployment, and the Fed is going to try and print more money to alleviate the situation. But at some point you're not going to have the policy latitude to do that because inflation can't be ignored or the dollar will weaken." Kasriel does believe the Fed will ease at its March 20 meeting, but more likely by 25 basis points than 50.
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