Rate-increase worries
keep investors on edge

Wall Street is afraid the Fed
may cut short the recovery before
earnings can take hold

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By Lisa Singhania
Associated Press

NEW YORK >> The mere mention of higher interest rates is enough to spark selling on Wall Street these days, but analysts say the skittishness is symptomatic of a broader concern: earnings.

Until investors get proof that business profits are improving and are convinced this month's market rally is the beginning of a turnaround, they will be more inclined to sell than buy. Anything perceived as a barrier to a recovery -- including the possibility that the Federal Reserve will start to raise interest rates again -- is a reason to pull back.

"The market hasn't performed as well since last Tuesday's Fed meeting. That's because some fear that if the Fed were to raise rates prematurely or too aggressively we might not end up with as much of a recovery," said Charles Reinhard, senior U.S. investment strategist at Lehman Brothers. "We don't think that the Fed is going to raise rates for a while still, but some investors are still worried."

Indeed, the Fed declined to raise rates Tuesday and issued a statement noting that the economy was expanding but the "degree of strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain."

Translation: Although economic data is improving, the Fed is still waiting for business performance and profits to catch up. Until that happens, the central bank, which cut rates 11 times in 2001 to increase growth, will be reluctant to do anything that might impede a recovery or scare off investors.

As a result, most market watchers expect it will be a few months -- if not late summer -- before interest rates budge at all.

Still, stocks retreated this past week, giving the Dow Jones industrials their first weekly loss since Feb. 8. The Nasdaq composite and Standard & Poor's 500 indexes also fell back.

Analysts blamed the selling on the market's concerns that, after two years of losses, a recovery will be muted at best. Just the possibility that the Federal Reserve might be preparing to raise rates later this year made Wall Street nervous.

"The two real pillars of this economy have been consumer spending and housing, and housing certainly has benefitted from warm weather and lower interest rates," said Larry Rice, chief investment officer at Fahnestock & Co. "If you pull any of those pillars away, you begin to question how sustainable the economic rebound is going to be."

There is some hope, though, that Wall Street's confidence might soon get a boost. First-quarter earnings season begins next month.

Although there have been some warnings of disappointing results, particularly in the technology and telecommunications sectors, there has been no rush to the confessional.

"The reason that pre-announcements have been so quiet is because people have ratcheted down their expectations to numbers that are achievable. If a company meets mediocre numbers, it will make people more comfortable we're on the right track, although we might not get a big rally," said Terri Spath, portfolio manager for Franklin Large Cap Growth Fund.

Spath is hopeful that companies will forecast stronger profits by the end of the month. That could give investors a better sense of how strong business will be, and whether stocks, which have risen sharply this month, have become too expensive.

The worry that stocks are overpriced has contributed to investors' reluctance to make any more bigger commitments to the market.

It's important to keep in mind, however, that Wall Street's pullback so far has been relatively mild. The Dow climbed 8.9 percent between Feb. 8 and March 15, and is still above where it started the year -- as is the S&P. The Nasdaq continues to lag, but that had been the case most of the month.

"Some of this is just a normal correction after a big advance," said Rice, the Fahnestock investment officer. "The market's gone a long way in the last couple of months."

For the week, the Dow fell 179.56, or 1.7 percent, to 10,427.67, after dropping 52.17 yesterday. It was the Dow's first weekly loss in five weeks, and cut short a 862.99, or 8.9 percent, winning streak.

The Nasdaq, which fell 17.44 to 1,851.39 yesterday, had a weekly loss of 16.91, or 0.9 percent.

For the week, the S&P lost 17.46, or 1.5 percent. It fell 4.89 yesterday to 1,148.70.

The Russell 2000 index, the barometer of smaller company stocks, scratched out a small weekly advance, gaining 3.27, or 0.7 percent. But yesterday, the Russell lost 3.05 to 502.39.

The Wilshire Associates Equity Index, which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues, ended the week at $10.776 trillion, down $127.83 billion from the previous week. A year ago the index was $10.475 trillion.