Wall Street rally
facing key hurdles

Rising gas prices and weak earnings
could hold back stocks

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By Lisa Singhania
Associated Press

NEW YORK >> Stocks have been advancing gradually for the past two months on a combination of interest-rate cuts and some economic reports that suggest the business climate is improving.

But there are potential spoilers ahead for Wall Street as summer approaches. Most worrisome are rising energy costs -- as many consumers preparing for the Memorial Day holiday weekend found out at the gas pump this week -- as well as the continuing murky profit outlook for most companies.

With gas prices up as much as 10 percent from the same time a year ago, resulting in regular unleaded gas prices of nearly $2 per gallon in some places, the fear is that consumers will cut back their spending to keep their cars moving.

"The market is expecting there's going to be relief in energy prices for consumers. The risk is that energy prices don't come down as quickly as we think," said Matt Brown, head of equity management at Wilmington Trust, who also worries that swelling consumer credit and debt levels could impede spending. "Essentially higher energy costs take money out of consumers' pockets that they'd otherwise be spending on autos or other goods."

That in turn can hurt retailers and retailing stocks, which have climbed more than 7 percent in the Standard & Poor's Retail Index during the past two months on expectations of a turnaround.

"The consumer is two-thirds of the economy. When you look at the big picture, less spending could lead to a slowdown in retailing which can mean layoffs and other problems," said Brown.

The health and strength of corporate earnings, which have been weak for nearly a year now, are another concern. With five interest rate cuts from the Federal Reserve since the beginning of the year and no signs of imminent economic collapse, most analysts agree a turnaround will occur -- but the question remains when.

Most of the recent stock buying has been predicated on the belief that fourth-quarter results will be strong, partly because of the improving economy. Also, year-to-year comparisons should be easier because the fourth quarter of 2000 was weak.

Still, there's been no concrete indication that corporate numbers are strengthening, even in industries whose business cycles are considered more predictable. One example: chemical products maker DuPont, which said Wednesday that business conditions are so difficult that it cannot forecast profits for the remainder of the year.

"I think the main difficulty the market will face is not going to be some major shock, but earnings," said Charles Pradilla, chief investment strategist at SG Cowen Securities. "If we get the sense there's a chance that earnings are not going to turn around until the first or second quarter of next year, then we'll have a downward turn."

Historically, summer has been a quiet time for the markets.

"You get reduced volume because everyone is on vacation and lower volume is usually equated with lower stock prices," said Jeff Hirsch, publisher of the Stock Trader's Almanac, who believes the best months for the market are between November and April. "There may be some good news though. There probably will be a July-early August rally."

Last summer, for example, stocks rose as investors bought stocks in hopes of cashing in on what was then still a bull market.

A similar catalyst for the markets might come this summer if the Federal Reserve makes its sixth interest rate cut of the year when it meets in late June. Fed Chairman Alan Greenspan indicated this week that the worst appears over, but further economic weakness might prompt another rate reductions.

Despite the uncertainty, many analysts remain bullish on the market's prospects looking ahead, although they expect the rally to slow down and be more uneven.

The Dow Jones industrial average has risen 17.2 percent from its lowest close for 2001 -- 9,389.48 reached March 22 -- but remains 6 percent from the blue chip index's all-time high reached in January 2000.

The Nasdaq composite index has gained 37.3 percent since it lowest close of 2001 -- 1,638.80 on April 4 -- although it is still 55 percent below its March 2000 peak. The Standard & Poor's 500 index is up 15.9 percent since its lowest close of 1,103.25, also made April 4, but is 16 percent from its March 2000 high.

"Between now and probably until Labor Day I'd expect drifting, choppy trading, with maybe a high of 2,400 and a low of 1,900 on the Nasdaq," said Pradilla.

"I would expect a more moderate upward trend in a more of a saw-tooth pattern than we've had," said Jim Weiss, head of equities at State Street Research. "We won't have good earnings news but I think when we get to July and total it all up there will be a few more companies that surprise on the upside for the second quarter so we will get a little bit of encouragement."

Stocks pulled back this week as expected after the index's recent big gains. Low volume ahead of the Memorial Day holiday might account for the muted reaction the markets had this week to news that U.S. Sen. James Jeffords was leaving the Republican party -- a move that gives Democrats effective control of the U.S. Senate and its various committee chairs.

The Dow finished the week down 296.37, or 2.6 percent, at 11,005.37 on a 117.05 loss yesterday.

The Nasdaq rose 52.15, or 2.4 percent, for the week. It closed yesterday at 2,251.03 after slipping 30.99.

The S&P 500 ended the week down 14.07, a 1.1 percent change, after dropping 15.28 to 1,277.89 yesterday.

The Russell 2000 index ended the week up 2.34 or nearly 0.5 percent, despite falling 1.78 yesterday to 508.62.

The Wilshire Associates Equity Index -- which represents the combined market value of all NYSE, American and Nasdaq issues -- ended the week at $11.849 trillion, down $120.48 billion from the previous week. A year ago, the index was $12.617 trillion.