The stock market's been like so many bored executives lately: all kinds of appointments, notations and conference calls on the calendar this week, and yet they're staring out the window, thinking about that trip to Bali in six months.
A full calendar awaits participants following
Martin Luther King Jr. Day
, chock-full of earnings releases, Wednesday's
Consumer Price Index release and a long-anticipated meeting of the ministers of the OPEC nations. If last week's activity is any indication, the market may shrug off all of those events, instead favoring recent sentiment, which now presumes more
Federal Reserve interest-rate cuts and improving economic growth in the second half of 2001.
Market internals confirm this optimism. More stocks ended the day higher than lower all five days last week on the
New York Stock Exchange
and each day except Monday on the
. Technicians generally believe that this, along with the increasing number of stocks hitting new highs, is a strong signal that the market is in the process of accounting for the weak earnings releases and pessimistic commentary coming from the analyst community.
Down the Road
"The equity market is caught between a rock and a hard place, and it's trying to see if we have adjusted enough to the realization that earnings are going to be in trouble," said Michael Strauss, managing director and chief economist at
Commonfund Asset Management
. "So, they're starting to
look at earnings six to nine months down the road."
That isn't easy. It's hard to ignore the fact that projections show fourth-quarter earnings grew just 4.5%, according to
. A number of investors interviewed still aren't convinced that the market has indeed hit bottom, but unlike a few months ago, they're no longer sure what the catalyst could be that would cause the market to decline sharply once again. After the Fed's aggressive response to shore up consumer demand to avert a recession, participants are convinced that the
Federal Open Market Committee stands ready to lower interest rates further.
The assumption made here is that lower rates will help the economy swing higher. But the investment community certainly isn't convinced this will happen yet, judging by the performance of cyclical stocks last week. The first week of January showed a methodical rotation into cyclical industrial companies like
, but those names were ignored last week. Instead, investors preferred technology names (also cyclical, but expected to grow revenue faster than companies like
Whether investors may simply be seeking out technology names because they consider them cheap, or whether a sense of dysfunction is creeping back into their psychology (such as a desire to buy growth with a smattering of defensive stocks as a hedge) is hard to pin down. Cyclical companies, which improve when the economy does well and stagger when it doesn't, would be expected to strengthen if the anticipation is for improving growth down the line. Due to the skittishness apparent now, it's hard to see how investors will ride technology much longer -- but that leaves them rotating out of tech into uncertainty.
"It's a good sign that a lot of things are advancing, but does that leave a leadership vacuum down the road?" says Dick Dickson, technical analyst at
Scott & Stringfellow
. "Will people be afraid to go after things like tech, and afraid to chase things that have not had a big run, like cyclicals and chemicals? If so, then
it shows we're worried about the economy."
Some of this worry stems from last Friday's
Producer Price Index release, which showed a 0.3% increase in core PPI (excluding food and energy prices), which was higher than expected. All kinds of inflation-related news will dominate the tape this week; Wednesday brings the release of the CPI, the market's broadest measure of inflation, and
ministers meet next week.
These factors could work at counter purposes. One theory regarding the Fed goes as follows: A higher-than-expected CPI report will cause Fed officials to ease back on the market's expectations that they'll aggressively cut the
fed funds rate, most recently dropped to 6% from 6.5%, when they meet Jan. 31. Pundits have suggested that the Fed is likely to cut rates by another half a percentage point.
Fed funds futures contracts, trading on the
Chicago Board of Trade
, are discounting a 73% chance of such a cut, although they were figuring on an 88% chance Thursday. But just as stocks perhaps traded on overly pessimistic expectations in December, the fed funds market may be trading with overly optimistic expectations now.
On the other hand, the Fed could continue to worry about energy, especially if OPEC does push through a cut in production, which would presumably constrain supply and cause some sort of price increase. OPEC's meeting begins Wednesday. While the Fed cannot itself affect energy prices, it has to respond to the bite energy prices take out of consumers' wallets, as it learned during the last few months.
If the market, so good at persuading itself that the worst (or best) scenario is on the horizon, succumbs to a bout of pessimism this week, the various earnings releases will probably only shepherd that process along. Most preannouncements are out of the way, but investors will be on guard for companies that fall short of expectations or talk of potential problems in coming quarters.
And there's a lot on the slate. Many of the financial institutions report this week, including
Bank of America
J.P. Morgan Chase
Bank of New York
, which has already
warned of slowing growth, is scheduled to report Tuesday and
, which has also talked of
slower-than-expected growth, shows up later in the week.