The Coming Week: Expect a Rate Cut and Plenty of Worry

Analysts will be looking closely at the economic data out this week.
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The major indices found some footing last week after plunging to three-year lows in the aftermath of the Sept. 11 attacks, but analysts remain cautious about making short-term forecasts for the market's direction.

The economic and political outlooks remain foggy, and Wall Street has a lot on its plate next week. The

Federal Reserve's policymaking arm meets Tuesday and is widely expected to cut interest rates by a half-point to 2.5%.

Initial jobless claims for the week ended Sept. 29 will be released Thursday. The data could provide a more realistic picture of the impact the terrorist attacks will have on the economy. And September's

employment report will come out Friday.

Don't Stop Believing

Some do believe that the underlying market trends are positive. "It's a very news-sensitive market, but we're getting a sense of what the U.S. is going to do, and it looks pretty restrained," said John Manley, chief market strategist at Salomon Smith Barney. "The market is finally certain that we are uncertain. We already know how bad things are."

Barring any major negative developments in the Middle East, any disappointments from the Fed, or any signs of shocking weakness in the economic data, the indices could move higher in the coming week, strategists said. Some of them are buying selectively for the long term.

"There's still a lot of bad news to come out, and the next couple of months could be pretty frustrating," Manley said. "But that doesn't mean down." Manley said he's betting the next major move -- 10% or more -- is up.

Charles Crane, stock market strategist at Spears Benzak Salomon & Farrell, prefers to take a longer-term view. "In a year, returns are going to be positive but they could be substantially negative in the short run," he said. "We're putting money to work in this market, trying to upgrade the quality of the portfolio." Crane said he's buying high-quality insurance stocks, where selling may have been overdone, and communications services stocks, which should benefit as more people conduct business over the phone. Crane is selling "cyclically flavored" sectors, whose fortunes wax and wane with those of the economy.

Fed Center Stage

The Federal Reserve is expected to cut interest rates for the ninth time this year when it meets this week. The fed funds futures market is pricing in a 100% chance of a 50 basis-point reduction that day and 20% odds that rates will fall to 2% before the Fed meets again in January.

"It's almost guaranteed that the Fed will cut by 50 basis points," said Cary Leahey, senior economist at Deutsche Bank Asset Management. "With a nine-year high on jobless claims and a 19-point drop in consumer sentiment from the August average, they really have to keep going. They can't give the impression that they don't care and are not watching."

Unfortunately, a half-point rate cut is so widely expected that the market probably won't get a whole lot of fuel out of it. Greenspan and company have been cutting rates since the beginning of the year, and they haven't yet turned the economy around.

In the long run, the 50 basis-point cut may mean a lot, but in the short term it won't, said Manley. "The Fed hasn't been the driver here for a while," he said, "and that probably won't change."

Data, Please

Expectations for a half-point cut might change Monday when the September

purchasing managers' index rolls in. The August report showed improvement in new factory orders, production and inventory levels. The index rose to 47.9 for August, well above July's reading and analysts' expectations. While a number below 50 indicates ongoing contraction, new orders rose to 53.1, the highest level since April 2000, and production climbed above 50 for the first time since last November. Export orders also rose above 50 for the first month in four. Leahey said another five-point jump in orders from the August reading could open up the possibility for a quarter-point rate cut.

After the Fed meets, the focus will turn to Thursday's initial jobless claims and Friday's employment report. Weekly data have taken on

greater importance since the terrorist attacks, as economists try to gauge the impact the attacks have had or will have on the economy. So far, much of the data released since Sept. 11 have been

dated or inconclusive.

Leahey suggested the September employment report won't reflect the impact of the attacks. "This number probably won't include the 100,000 airlines-related layoffs," he said. "And then you're seeing figures in the hotel and leisure industry, which are clearly mind-boggling, of 500,000 layoffs likely in the next few months."

He predicted a decline of 100,000 in nonfarm payrolls for the month of September. "They would need to be down 150,000 or 200,000 for investors to fall off their chairs," he said.

Peter Boockvar, market strategist at Miller Tabak, thinks the data from the last week of September have become particularly important. "Everyone knows that the week of the attacks and the week after were disastrous," he said. "What they want to know is what happened this week. Did things get moving again? That's what people will look to."