Economic data to drive stocks in coming weeks
NEW YORK » Prospects for a year-end rally dimmed this past week right along with the chances of another interest rate cut, and that has investors wondering if the bull market can be saved.
Investors enter November with some considerable doubts about corporate earnings, inflation, the continuing credit turmoil, the Federal Reserve's next move, and whether the U.S. might plunge into a recession. All this hangs over the stock market, which has been at best fragile this year.
The quarter-point cut wasn't enough to satisfy Wall Street, which wants to see further reductions to help stimulate everything from cheaper loans to corporate borrowing. And, the Fed's inclination that it might not lower rates again this year sent the Dow Jones industrial average tumbling 1.5 percent this past week.
The tug-of-war between Wall Street and the Fed has individual investors wondering whether this past week's market decline was a temporary shakeup or a signal to re-evaluate stocks altogether. Most people aren't expecting a worst-case scenario, but some observers say economic data will be a key to determining the market's direction.
"It is almost futile to try and watch everything because this is going to become a data driven market again," said Chris Johnson, president of Johnson Research Group. "Before we were waiting for what the Fed was doing, but now all of a sudden that safety net is gone."
Johnson and others caution not to react too quickly to economic reports from the government and trade groups due over the next few months. The data typically give a backward look at the economy, and it often takes time to get a good interpretation of what the numbers mean.
For instance, yesterday Wall Street got a surprisingly strong report from the U.S. Labor Department that showed 166,000 new jobs added in October -- yet no rally followed. A more careful reading of the data indicated that fewer people were employed overall last month.
Even the Fed's decision on Wednesday led to a delayed reaction by investors. At first, the cut was seen as good news and sent the Dow up 137 points. But, on further examination, it showed that policymakers were worried about inflation and oil reaching a new record high -- raising the possibility the Fed might stop cutting rates, and even consider raising them.
"The market always tends to worry about things, and always exaggerates them," said Peter Cardillo, a market strategist with Avalon Partners. "I have a suspicious feeling that is what's happening right now. The market is looking for good economic news, data that doesn't sink the economy into a full-blown recession."
With the Fed unlikely to cut rates, the market wants to see reassuring economic readings. This would indicate that inflation remains in check and the economy continues to plow ahead.
But there are unknowns -- the biggest is the financial sector, hit hard during the third quarter after taking massive write-downs from investments linked to the subprime mortgage industry. Investors at first believed financial institutions like Citigroup Inc. and Merrill Lynch & Co. had taken the bulk of their losses, and would likely have better earnings going forward.
However, analysts in recent days believe more pain is in store. There was speculation that Goldman Sachs Group Inc. might take a big charge for exposure to the mortgage-backed securities market, which cost banks some $25 billion of write-downs during the third quarter. And many expect Merrill will write off about $4 billion from wrong-way bets in the credit markets after a $7.9 billion write-down in the third quarter.