Earnings are coming, and they're going to be good. Big deal.
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Yes, it's ugly to think the market won't at least momentarily take its eyes off of interest rates to gaze lovingly on third-quarter results. Consensus estimates call for
companies to add 19.3% to their numbers over last year, according to
First Call/Thomson Financial
, and it is likely that, as is usually the case, final results will be even better than that.
But with the
Federal Open Markets Committee's
move to a tightening bias at its meeting on Tuesday, the market still lacks clarity on what's going on with interest rates. Effectively, the bias tells the market that the Fed will weigh the coming economic data and then figure out if it should hike or not.
"The Fed's action will keep investors obsessed with every statistical wiggle that crawls across the tape," said Charles Crane, chief market strategist at
Key Asset Management
. "That means volatility, and whether the market recovers to post a new high or if it drops below 10,000 will depend on the tenor of economic statistics between now and the next Fed meeting."
Economists are pretty much on the fence when it comes to Fed. One camp says the odds favor tightening; the other says they favor standing pat. Friday's bizarro September
, with its unexpected drop in payrolls, did nothing to resolve things. Because it was so out of whack with estimates, there's a general sense that there will be a payback when the October numbers are reported next month.
"If, as many suspect, this number was subject to distortion, you could still get a very strong number next time around," said Marc Wanshel, financial economist and Fed watcher for
. Moreover, Wanshel notes that in the minutes to the Aug. 24 meeting, the FOMC said it was "concerned about the potential for increased cost pressures even if the labor market doesn't get any tighter."
Yes, the economists at J.P. Morgan think the Fed's going to tighten in November.
Not that the outlook from those who think we'll squeak by without a rate hike this is entirely sanguine.
"We're looking for pretty bearish economic numbers through the rest of the month," said Mike Cloherty, senior economist at
Credit Suisse First Boston
Inflation numbers don't look like they'll be all that good. The September
Producer Price Index
, coming out on Friday, should gain about 0.5% overall, 0.4% excluding food and energy prices, according to First Boston (both those numbers are 0.1% ahead of consensus). Oil prices stayed strong in the month, and
R.J. Reynolds Tobacco
boosted prices to distributors by 11%.
On the positive side, Cloherty said there should be some signs of moderating growth in the September
figures, coming out on Friday. The suggestion of a slowing may take enough of the sting out of strong inflation data this month to keep the Fed pat.
"In the end, we think the data isn't going to be strong enough to force the Fed to move in November," said Cloherty, "but it seems unlikely that we'll have enough data to have any confidence in that until the next employment report" at the beginning of next month.
But just because the market remains on Fed watch, and just because there remains a real possibility there's another hike coming, doesn't mean stocks have a heck of a lot of downside left in them. The economists at
Salomon Smith Barney
are some of the more hawkish ones on the Street, but the strategists at the firm doubt there's much stuffing left to knock out of equities.
"At this point, everything we look at tends to say that things are about as bad as they're going to get," said Solly equity strategist Jeffrey Warantz. "The Fed, they've done their damage. The market has pretty much priced in the expected rate increase."
Though he doesn't expect a shoot-em-up rally at the end of the year, Warantz does believe stocks will be higher when everyone's trying to remember the words to
Auld Lang Syne
. "Do I expect to see
12,000 by the end of the year? Absolutely not. Do I think it's possible that the Dow could end the year at 11,000? It's well within reason."
The bond market will be closed Monday for Columbus Day