Wall St Week Ahead: Fed rate cut, jobs data may lift stocks Fri Jan 25, 2008 6:35pm EST
By Cal Mankowski NEW YORK, Jan 25 (Reuters) - Wall Street may put the brakes on a steep decline next week, when a rate cut is anticipated from the Fed, and Friday's monthly jobs data may trigger a comeback for stocks after their January funk. Even after this week's two-day rally, stocks finished Friday in the red and remain down sharply for the year so far. The Dow is down 8 percent, the S&P 500 is down 9.4 percent and the Nasdaq is down 12.3 percent. The Federal Reserve's meeting is expected to result in a reduction of 50 basis points in the fed funds rate, now down to 3.5 percent. The central bank's announcement will come only eight days after the Fed took emergency action on Tuesday and cut rates by 75 basis points. The move was surprising -- not only for its size -- but also because it came outside of a scheduled policy meeting. The Fed acted as stocks were falling worldwide and about an hour before the U.S. market opened on Tuesday after a three-day holiday. The Federal Open Market Committee's announcement is expected on Wednesday, at the conclusion of a two-day meeting. John Praveen, chief investment strategist for Prudential International Investments Advisers LLC in Newark, New Jersey, said investors will study the wording of the Fed's announcement. Indications that further rate cuts are possible will cheer the markets, while signs of future restraint or a "wait- and-see" attitude would be disappointing, he said. But the Fed will not be the only game in town next week. A blizzard of economic reports, including data that may show contraction in fourth-quarter gross domestic product, and quarterly earnings from several Dow components, as well as a major speech by the president, will compete with the Fed and the jobs data for investors' attention. TUNING IN TO THE PRESIDENT On Monday evening, President Bush will elaborate on his views of the U.S. economy in his annual State of the Union address. Investors on Wall Street and Main Street are likely to pay more attention than usual to the president's remarks following this week's decision on a tax-rebate plan. On Thursday, President Bush and congressional leaders agreed on a $150 billion fiscal stimulus package that would include tax rebates for individuals and families. The plan awaits formal action by Congress. News of the tax-rebate plan helped stocks extend Wednesday's rally, a day after the Fed's emergency rate cut, into sharp gains on Thursday. Discussions on shoring up the finances of the "monoline" insurers -- companies that insure trillions of dollars of bonds -- also seemed to soothe frazzled investors' nerves. "I think we got relief to some extent as a result of what the Fed did, as well as the talks around the monoline insurers and the stimulus package," said David Joy, chief market strategist for RiverSource Investments in Minneapolis. "All three provided some relief from the excessive fears of an economic meltdown." For the past week, the Dow Jones industrial average .DJI rose 0.9 percent and the Standard & Poor's 500 Index .SPX gained 0.4 percent. The Nasdaq Composite Index .IXIC <http://www.reuters.com/finance/markets/index?symbol=us%21comp> fell 0.6 percent. WANTED: MORE JOBS While Wall Street will have a heavy load of economic numbers to consider next week, one that stands out is the report on January nonfarm payrolls, due on Friday. "If it shows that the December report was an aberration, then the market could derive some real strength from that," Joy said. In a Reuters poll of economists, the median forecast is for January payroll growth of 63,000 jobs, and an unemployment rate of 5.0 percent. The December report showed a meager 18,000 new jobs and the jobless rate rising to 5.0 percent from 4.7 percent, the biggest increase in the rate since 2001. Friday's agenda of economic data includes the Institute for Supply Management's report on factory activity in January. The ISM's December report was another shocker, with the manufacturing index falling to 47.7, the weakest reading since April 2003. The drop put the index below 50, a zone that indicates contraction rather than growth. In the Reuters survey, the index is seen slipping to 47.3. If the ISM figures and the payroll data together show improvement from December, a big boost in confidence is likely. But if the numbers turn out disappointing, it could be unsettling. While Friday's economic reports are major hurdles for the stock market, the week's data includes new home sales on Monday, durable goods orders and housing prices on Tuesday, and the first look at the economy's pace, as measured by gross domestic product, in the fourth quarter, due on Wednesday. The poll shows economists anticipating that the economy grew at an annual pace of 1.2 percent in the fourth quarter -- much slower than in the third quarter. A report on personal income and spending is due on Thursday, and several polls on consumer attitudes' are also on the economic calendar for the week. For a complete list of the week's U.S. economic releases and forecasts, see [ECI/US]. EARNINGS GALORE As if a Fed meeting and a slew of data are not enough, Wall Street is still in the midst of a quarterly earning season. With about one-third of S&P 500 companies having reported quarterly results already, earnings per shares on average are 25.6 percent below Wall Street expectations, according to the latest Reuters Estimates scorecard released Thursday night. Revenues are 4.1 percent below expectations on average. This compares with a year ago, when average EPS beat Wall Street's expectations by roughly 3 percent. American Express Co (AXP.N: Quote <http://www.reuters.com/stocks/quote?symbol=AXP.N> , Profile <http://www.reuters.com/stocks/companyProfile?symbol=AXP.N> , Research <http://www.reuters.com/stocks/researchReports?symbol=AXP.N> ) and McDonald's Corp (MCD.N: Quote <http://www.reuters.com/stocks/quote?symbol=MCD.N> , Profile <http://www.reuters.com/stocks/companyProfile?symbol=MCD.N> , Research <http://www.reuters.com/stocks/researchReports?symbol=MCD.N> ) report on Monday. Boeing Co (BA.N: Quote <http://www.reuters.com/stocks/quote?symbol=BA.N> , Profile <http://www.reuters.com/stocks/companyProfile?symbol=BA.N> , Research <http://www.reuters.com/stocks/researchReports?symbol=BA.N> ) is due on Wednesday and Procter & Gamble (PG.N: Quote <http://www.reuters.com/stocks/quote?symbol=PG.N> , Profile <http://www.reuters.com/stocks/companyProfile?symbol=PG.N> , Research <http://www.reuters.com/stocks/researchReports?symbol=PG.N> ) reports on Thursday. A number of pharmaceutical companies will be reporting quarterly results, among them Merck & Co Inc (MRK.N: Quote <http://www.reuters.com/stocks/quote?symbol=MRK.N> , Profile <http://www.reuters.com/stocks/companyProfile?symbol=MRK.N> , Research <http://www.reuters.com/stocks/researchReports?symbol=MRK.N> ) on Wednesday. All are Dow components. Pulte Homes Inc (PHM.N: Quote <http://www.reuters.com/stocks/quote?symbol=PHM.N> , Profile <http://www.reuters.com/stocks/companyProfile?symbol=PHM.N> , Research <http://www.reuters.com/stocks/researchReports?symbol=PHM.N> ) reports results on Wednesday. Home builders have been major casualties of the subprime mortgage bust, but the stocks lately have moved up from their lows. On Thursday, brokerage Raymond James raised its ratings on a number of the home builders, including Pulte. According to data from Reuters Estimates on Jan. 21, fourth-quarter earnings for S&P 500 companies were projected to decline 10.9 percent from a year earlier. The report included companies that reported results and estimates for those yet to report. Praveen noted that by taking out the earnings of financial companies, skewed by enormous losses at some institutions, earnings for all other companies, in aggregate, should be positive. "If earnings outside of financials are up around 5 percent, the market will be satisfied," Praveen said. "Given the gloom and doom we are in right now, that kind of number is probably going to be seen as a relief." Mike Binger, portfolio manager at Thrivent Financial in Minneapolis, said, "I think the combination of the big rate cut, the stimulus package and some good corporate earnings are kind of proving to people we're not falling off a cliff." Binger expects continued market volatility, but he thinks financial stocks and technology issues could be bought on the dips. He thinks retailers, another beaten-up sector, may also be worth buying on declines. (Wall St Week Ahead runs weekly. Questions or comments on this column can be e-mailed to: cal.mankowski(at)reuters.com) (Additional reporting by Jennifer Coogan and Caroline Valetkevith; Editing by Jan Paschal)
