Wall Street may focus more on decisions made in Congress than decisions made by the
Fed in the coming week.
Though economists are almost evenly divided as to whether the
Federal Open Market Committee will cut interest rates by 25 or 50 basis points this Tuesday, after nine rate cuts this year, that decision likely won't jolt the market this week, observers believe. With big data and earnings news quieting down, the focus may instead be on government spending programs now in Congress.
"I don't think the market is as focused on what the Fed is up to," said Tony Crescenzi, CEO of BondTalk.com. "It's more focused on fiscal stimulus. There's a lot of wrangling over that. The budget is going to be very important. It could go to the floor next week. They're trying to move it as quickly as possible."
Already, the fed funds target rate has fallen to 2.5% from 6% at the beginning of the year, but the economy has only gotten worse. Most market watchers expect the cuts to turn the economy around eventually, but it may take a while. Fed funds futures, a good proxy for the market's expectations, were pricing in a 60% chance of a half-point cut Tuesday. According to
, 15 of 24 primary dealers are looking for a half-point cut.
The stimulus package might be more immediate. Following a
dismal October employment report Friday, legislators are trying to push forward a stimulus package totaling $70 billion to $100 billion, which would include hefty tax cuts for businesses if the Republican House gets its way. The Senate is proposing fewer tax cuts and more spending programs.
Big Mo' Simmers Down
In the meantime, the equity markets lost a little momentum last week, but the bias in the midterm is up, strategists said. "Up more than down is the bottom line," said John Manley, equity strategist at Salomon Smith Barney. "Whether the next 5% is up or down, I don't know, but if it does go down 5%, I'd buy it, because stocks are more likely to be up 10% to 20% in the near term."
After rising 14% since Sept. 21, the
S&P 500 lost 1.6% to 1087.20 last week. The
Dow Jones Industrial Average, which had gained 16% over the same period, lost 2.3% last week to 9323.54, and the
Nasdaq, which climbed 24% since the week after the terrorist attacks, slipped 1.3% to 1745.73. Still, on Friday, blue-chips managed to close higher, and tech stocks were flat, despite a weak
jobs report. Strategists said investors continue to look forward to an economic recovery in the second quarter of next year.
"People are getting a little greedy about the potential upside after losing money for the past year and a half," said Thomas McManus, equity portfolio strategist at Banc of America Securities. "Their profit-making glands are excited about this prospect of eventual recovery." Analysts on Wall Street are now forecasting that both earnings and the economy will begin to recover in the 2002 second quarter.
Investors had a couple of good reasons not to get too discouraged by the terrible jobs report. The data showed the biggest monthly decline in jobs in 21 years, and unemployment soared to 5.4% from 4.9%. But the October report might reflect the one-time impact of Sept. 11 rather than signal the beginning of a long and deep recession.
"We have to be careful about making projections using October data, because much of the weakness may not be repeated," said Crescenzi. "Layoffs in the airline industry and the hotel industry will probably be one-time occurrences." Capital spending might get a much-needed boost by the U.S. Treasury's decision Wednesday to stop issuing 30-year bonds, a move that brought down long-term interest rates.
The drop in long rates makes bonds less attractive compared with equities. "Stocks vs. bonds were extremely depressed," Manley said. "That tells me a lot of bad news has been priced into the market already."
Earnings Season Wanes
Third-quarter earnings reports will be thin next week, though a couple of big names will be in the lineup. Just 22 of the companies in the
report earnings, compared with 45 the previous week and 160 the week before that. Analysts now expect S&P 500 earnings to decline 21.8% in the third quarter. Before the terrorist attacks, they were forecasting a 14.7% drop. Fourth-quarter numbers, along with those for the first half of 2002, continue to come down. S&P 500 earnings are seen falling 16.3% in the fourth quarter and 5% in the first quarter of next year, but growth should resume in the second quarter to the tune of 9.8%, according to analysts.
The biggest name on the schedule is
, which will report earnings Monday after the market closes.
also reports next week, as does
. But investors don't seem to be paying much attention to earnings these days, whether the quarterly numbers are good or bad.
"The market seems not to care about little bits of good news right now," said Ulrich Weil, technology strategist at Friedman Billings Ramsey. "Quarterly earnings are largely being treated with benign neglect. If they're very good, then it just adds to the euphoria. If they just barely meet expectations, then the news has about a half-life of one day before people remember that they're looking across the valley."