Kinder, gentler Wall St.

Businesses’ caution about the future
still a concern for market

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By Lisa Singhania
Associated Press

NEW YORK >> Wall Street's recent string of triple-digit rallies and a rare week of solid gains might give some investors hope that the bear market is finally ending.

But there are still plenty of reasons to be skeptical, including the fact that the number of companies issuing pessimistic forecasts for the current quarter is growing.

"We've been in a trend the last several quarters where the ratio of negative to positive (outlooks) had been declining, but now that's popped back up," said Chuck Hill, director of research at Thomson First Call.

Thomson First Call counted 557 preannouncements for the current quarter, as of Aug. 8, the most recent data available. Of those, 308 have been below analysts' expectations, 110 in line with forecasts and 139 above estimates. Negative forecasts outnumber positive ones more than 2 to 1.

Although that ratio is still an improvement from what it was for most of 2001, it represents a retreat for this year. Three months ago, at the same point in the second quarter of this year, there was roughly one negative pre-announcement for every positive one. Six months ago, at the same point in the first quarter, the ratio was just under 2 to 1.

The current quarter won't end for most companies for another six weeks, but Hill expects the negative tone to continue.

"I don't see it going back down to the kind numbers we had in the second quarter or the first quarter," Hill said.

Analysts say the trend is worrisome, but not that surprising given the recent spate of uninspiring-to-negative economic data, including weaker-than-expected gross domestic product for the second quarter and disappointing findings on employment and business activity at the beginning of the month.

In recent weeks, a number of companies have issued cautious to gloomy business outlooks. Among them: Verizon, Best Buy and Cisco Systems.

Although extreme pessimism on the part of companies and investors is considered to be one indicator that the end of a bear market is near, most market observers are hesitant to say the increase in weak forecasts translates into anything positive for stocks.

"The market is still not cheap, and without the market being cheap and earnings estimates coming down, you have to ask yourself what the catalyst is going to be to get this market going," said Russ Koesterich, U.S. equity strategist at State Street Corp. "I don't know if the risk is so much to the downside, but to what is going to get the market to move up. There may not be a catalyst."

Right now, Wall Street is focused on two events coming up next week: consideration of a possible interest rate cut by the Federal Reserve and a deadline set by the Securities and Exchange Commission for the nation's largest companies to certify their financial results.

More economic data is also expected, and investors will be watching closely to see what the new numbers on jobs and business activity signal about the health of the economy.

Once those events pass, however, investors will again look to earnings forecasts in deciding whether they are better off buying, selling, or just sitting tight. Sluggish or disappointing numbers will make that decision all the more taxing.

"I think it makes it harder for any rally to be sustained or that you create new ground for a new bull market," said Christopher Wolfe, equity market strategist for J.P. Morgan Private Bank. "We all know that September and October tend seasonally to be difficult months for the market, and everyone is anticipating they will be bad this year too."

Wall Street's major indexes all ended the week higher for the first time since May 17 -- nearly three months ago.

The Dow Jones industrials rose 432.32, or 5.2 percent, for the week. The blue chip index closed up yesterday 33.43 at 8,745.45.

For the week, the Standard & Poor's 500 index gained 44.40, or 5.1 percent, after edging up 3.18 yesterday to close at 908.64.

The Nasdaq composite index had a weekly gain of 58.20, or 4.7 percent. Yesterday, the Nasdaq fell 10.40 to 1,306.12.

And the Russell 2000 index recorded a weekly advance of 12.00, or 3.2 percent. Yesterday, the Russell, which tracks smaller company stocks, fell 1.39 to 388.45.

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 $8.571 trillion, up $385.31 billion from the previous week. A year ago, the index was $10.994 trillion.