The market will continue to focus on regulatory details coming out of Washington, D.C. next week, hoping officials will make decisions to right the faltering economic ship.
As employment data and earnings reports provide evidence of a struggling economy, political wrangling over a $790 billion stimulus package and Treasury Secretary Timothy Geithner's vagueness on a financial rescue plan have added uncertainty to the sensitive financial markets. The
Dow Jones Industrial Average
wavered last week from 7,662.04 to 8,376.56 -- a difference of over 700 points -- as President Barack Obama and his team got its first taste of how difficult it is to reach a political consensus on two expansive bills with humongous price tags. The stimulus package
late Friday night, although Republican opposition was almost unanimous.
The market now awaits specifics on Geithner's proposed $1.5 trillion plan to
the financial system by recapitalizing banks and incentivizing the private sector to buy their bad assets. However, it's unclear how those
will be priced, what the ultimate costs will be, who will benefit or whether the plan will actually work.
"It's the million-dollar question -- or should I say the trillion-dollar question," says Terry Buffalo, president and CEO of First Midwest Securities. "Every time he speaks -- meaning Obama or Geithner -- the market goes tumbling. There are no details, banks aren't lending, and until they start lending money to consumers, things won't recover."
Three top economists -- Nouriel Roubini, of New York University; Kenneth Rogoff, of Harvard University; and Nariman Behravesh, chief economist for IHS Global Insight -- warned at an event on Friday that if the banking system is not fixed correctly and quickly, the severity of the financial crisis will only worsen.
The stimulus bill is "like giving a blood transfusion while the patient is still bleeding," Rogoff said at an event in Houston hosted by Cambridge Energy Research Associates. "If we're not going to fix the banking system at the same time, then it's just a temporary boost in the economy. We have simply not taken the proper decisive action with the banks."
Roubini, Rogoff and Behravesh agreed that the financial crisis is the worst since the Great Depression, though the government's intervention so far has helped contain the damage. Last week's economic data included a surprise 1% rise in retail sales in January amid sharp discounting and holiday inventory clearance. However, the news was overshadowed by bleak initial jobless claims figures, which are 84% higher than they were a year ago.
Next week's earnings calendar includes a bevy of consumer-based businesses that may provide more indications of weak demand.
reports on Tuesday, followed by
on Thursday and
Eric Marshall, portfolio manager of Hodges Capital Management, is keeping his eyes out for companies like
Buffalo Wild Wings
, which has a strong balance sheet and surprised investors last week with big earnings and revenue gains, and a 7% rise in same-store sales.
"We're now in an environment where the wheat is being separated from the chafe," says Marshall. "Companies like that, that can stand out in this difficult environment, will be rewarded."
Major economic reports kick off on Wednesday during a holiday-shortened week, with housing starts and building permits, as well as capacity utilization, industrial production and minutes from the
late-January meeting. But Lee Munson, chief investment officer with Portfolio LLC, says inflation figures set to come out on Thursday and Friday are more substantial.
Munson believes that any indication of deflation will hurt the market, noting that China had a significant decline in inflation last week.
"We may be next," he warns, adding that "the black swan is if the PPI/CPI suggests we are heating up ahead of schedule. Shorts beware."
Munson says another "wild card" for the markets is whether a regulatory investigation into outsized returns at the investment firm
uncovers any type of malfeasance.
That could be the bombshell if the
finds the returns really were too good to be true," says Munson. "If we have a deflation scare and another fraud, we go lower."
In a treacherous market like this, don't invest alone. Every trading day on Stockpickr Answers, investing professionals respond to questions posed by members of the Stockpickr community. Next week's pro lineup includes Dan Fitzpatrick and David Peltier. For next week's full schedule, visit Stockpickr.com.