Next week, investors will continue to digest the government's major interventions into the financial markets and high-profile firms and prepare for earnings reports in the weeks ahead.
Despite widespread public outrage and government initiatives to slash bonuses at
and investigate compensation at
Bank of America's
Merrill Lynch unit this week, the markets breathed a big sigh of relief. The
Dow Jones Industrial Average
rebounded more than 1,000 points at times over its recent low of 6,440.08, which was set March 9.
steep cut to its first-quarter earnings outlook may be a harbinger of further warnings ahead.
Xerox slashed its outlook by 80%, due to a hefty restructuring charge and a weak outlook for tech spending amid the economic slowdown. Over the next month or so, several high-profile companies whose profitability relies on the health of the consumer and the financial markets will report results.
will kick off the earnings of Dow components on April 9, followed by
Johnson & Johnson
, all within the first half of April. While many consumer-dependent businesses provided first-quarter outlooks at the start of 2009, and companies with financial exposure like JPMorgan, Citi, GE and BofA have recently asserted their financial health, it's unclear how firm the bottom line will actually be.
"Next week it's going to be interesting to see if we can hang on to those gains and maybe keep it going," says Thompson S. Phillips Jr., president of T.S. Phillips Investments in Oklahoma City.
Phillips says it was difficult convincing clients in recent weeks that fleeing the market during a swift downturn was the wrong move. He takes heart from recent statements by the CEOs of Citi and Bank of America that they have operated at a profit in recent months, as well as from Edward Liddy's testimony before Congress this week that AIG is working through its toxic debt.
"They're the canary in the coal mine, and if they're doing it, other people are doing it too," Phillips says, referring to AIG. "We just don't hear about it."
Indeed, Liddy's statements about unraveling credit-default swaps was not what most viewers or media reports were focused on during the AIG malaise of the past week.
Congress' push to tax AIG bonuses by 90%, and New York Attorney General Andrew Cuomo's receipt of details he demanded about bonuses at AIG and Merrill show the government is taking a markedly hands-on approach to managing Wall Street. Those moves, along with the
decision to buy more than $1 trillion worth of Treasury bills and mortgage-backed securities have been a cold shock to the capitalist veins on the Street.
"The problem is there is a cacophony of noise at all levels -- surprises to economic data to malfeasance to bonuses," says Gary Hager, president and founder of Integrated Wealth Management. "It's almost like you want to shut the system down for a little while to take a breather and clear your head."
Michael Falk, vice president and chief investment officer of ProManage LLC, notes that the major components of gross domestic product -- consumption and corporate spending -- have remained weak as the credit markets have tightened, unemployment has risen and consumer confidence has slumped.
"Historically consumers have made up two-thirds of GDP, but consumers are taken off the list right now," says Falk. "Then you go down the line and corporations are tightening their belts. So if you look at it as a three-legged stool, we're on one leg now -- government spending -- and in that respect, the government is doing its job."
Hager and others would like to see the government make good on recent mumblings about re-implementing the uptick rule for short-selling and easing up on mark-to-market accounting rules.
While it's impossible to guess what news will come out of Washington or the corporate press-release factory, few expect economic data to provide the market with a positive catalyst next week. Economists polled by Briefing.com expect both new- and existing-home sales to decline, durable-goods orders to drop 2% and lower personal income and personal spending than in the previous month.
Hager says that GDP, home-sales, and weekly employment reports next week will be closely watched. While market sentiment has been a "flat line" of negativity for a while, he says signs of improvement could help boost the "little bit of percolation" recently emerging.