The Coming Week: Investors Try to Figure Out When the Selling Will Stop

Earnings warnings will probably pick up as the averages near support.
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Just two weeks after terrorists attacked the World Trade Center and the Pentagon, Wall Street is riddled with uncertainty over the impact those attacks will have on the sluggish economy, and what kind of war might result.

The direction of stocks in the coming week is just as uncertain.

"The bottom line with the market is, if something bad happens, we can go down another 800 to 1000 points," said Scott Bleier, chief investment strategist at Prime Charter. "But if something good happens, we could see that kind of swing to the upside." Any developments on the "war" front, in particular, could induce these kinds of swings.

But some weekly economic data on consumer spending and jobs, as well as any earnings announcements from corporate America, could act as catalysts for the market.

The TM-UBSW Weekly Chain Store Sales Index and the Redbook Retail Average, both for the week ended Sept. 22, are released Tuesday, and jobless claims for the week ended Sept. 17 come out Thursday. These two releases could give investors some clues as to how the terrorist attacks have affected the economy.

But data releases taken from before the attacks, like the durable goods orders for August out Thursday, are probably useless at this point. In the wake of last week's events, the outlook for the economy and for monetary policy has changed drastically. Previously, most economists were expecting consumer spending to rescue the economy from recession. But now, economists say consumer spending will likely give out, leading the economy into recession in coming quarters. On the positive side, a rapid recovery next year is expected to follow due to more intense monetary stimulus. In response to the events of Sept. 11, the

Federal Reserve slashed interest rates by an additional half-point Monday morning, and the majority of economists are forecasting another half-point cut to interest rates when the Fed meets in early October.

"The disruption from this event will take its toll on third-quarter numbers, turn them negative, and the economy will contract into the first quarter," said Jim Glassman, senior U.S. economist for J.P. Morgan Chase. "But it will snap back more briskly in the spring of next year," he said.

Glassman conceded that the exact opposite could also happen.

"It's just as likely that it could go the other way. The most likely scenario is what we're forecasting. But this experience is much different than anything we've seen before. It's not like typical wartime. There's plenty of opportunity for patriotism and generosity to turn into something much more positive. If the coming data shows that the consumer is defiant, not shattered, that would be very different."

On the earnings front, companies in several different industries -- particularly the airlines -- lowered their earnings guidance last week. But market analysts say that should continue in the coming week, when earnings warning season typically gets into full swing.

"Every consumer company is going to have to warn -- retailers, restaurants, entertainment, publishing," said Bleier. "Those companies that have been waiting probably won't wait a whole lot more. We'll start getting warnings next week."

Bleier says his firm is buying stocks with substantial cash flow and high yield right now, like telco

Verizon

(VZ) - Get Report

, despite the trouble it's had as a result of the attacks.

Safety Net

Whatever news comes out next week, there may be at least a tenuous safety net supporting the market. Last week's losses were severe, and the indices are now nearing the lows of October 1998, which many technicians have pegged as support -- levels off of which stocks could bounce higher.

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For the week, the

Dow Jones Industrial Average lost 14.2%, its fifth-worst weekly percentage decline in history, putting it at 8236. The

Nasdaq Composite Index fell 16% to 1423, its worst weekly drop since April 2000. And the

S&P 500 lost 11.6% to 966. By comparison, the lows of October 1998 are 7400 on the Dow, 923 on the S&P and 1357 on the Comp.

One positive sign: The group hardest hit early in the week -- the airline stocks -- recouped some lost ground Friday.

"Longer-term investors, like pension funds, will probably begin to commit cash at some point," says Bleier. "It's just hard to say when and how much." Longer-term investors, particularly the insurers, who have been trying to raise money to cover enormous claims from the disaster, were thought to be behind a lot of last week's selling.