Star-Bulletin news services
NEW YORK >> With the war winding down, Wall Street stumbled lower this past week as investors shifted their attention to first-quarter earnings reports. Many believed that change bodes poorly for stocks because of concerns that the war curtailed spending by consumers and businesses, and therefore eroded company profits. Wall Street will be
watching corporate
outlooks closelyBy Hope Yen
Associated PressBut analysts say the more crucial factor will be the outlook statements issued with the reports; these statements will reveal how confident companies are about growth and capital spending needed to revitalize the economy later this year.
"Who cares about the first quarter? First, the numbers are distorted because of the war, and second, they're history," said Chuck Hill, director of research at Thomson First Call. "We should always pay more attention to comments accompanying the reports."
Hill explained that the profit outlooks will be key since many analysts have forecast stronger growth in the second half of the year. Cautionary statements contradicting that view, he said, could dash hopes for a market rally even though the uncertainty of war has largely ended.
"We're at a crucial time here in this recovery," Hill said, noting that economists already have pushed back twice in the last year their forecasts of a stronger economic rebound due to tepid corporate outlooks.
"The question is, are companies going to slash numbers again and push back, or will the wolf really appear this time in the form of a big pickup in earnings later this year," Hill said.
There was evidence this past week of the market's concerns about forecasts for the future.
The Dow Jones industrials suffered a losing week, primarily on a 100-point slide Wednesday that came despite news that Saddam Hussein's government had toppled. And on Monday, a 243-point rally fizzled although Dow component Alcoa posted stronger-than-expected earnings.
It was a striking contrast to the war's beginnings more than three weeks ago, when stocks surged 200-plus points on several occasions on bets of a quick victory. The losses seemed to counter conventional wisdom that the war's uncertainty was the main hindrance to a market surge.
Analysts said Wall Street's reaction was not entirely surprising, and noted that investors had already pushed stocks sharply higher in anticipation of a war and subsequent rally. Indeed, before this past week, the Dow had gained 753 points, or about 10 percent, since March 11, a week before the military conflict began.
"The market tends to be a forward-looking pricing mechanism. So the market started celebrating early and predicting the end," said Arthur Hogan, chief market analyst at Jefferies & Co.
"Unfortunately, we're going from one roller coaster to another. We had an emotional rollercoaster with news from Iraq. Now we have a roller coaster with each company warning or guiding," he said.
Hill said companies' capital spending plans also will be critical, since many economists believed companies were unwilling to invest amid the war uncertainty. McDonald's this past week became one of the first companies to say it would sharply cut spending in a bid to boost its fast-food sales.
"Companies aren't going to turn on the capital spending spigot until we sop up some of that excess capacity," he said. "We've got too many burger joints, but also too many automobile assembly plants, too many teenage apparel stores and on down the list."
In the meantime, analysts say investors should expect more choppy trading as the market sorts out the corporate outlooks released in the coming weeks.
"I expect forecasts for the year will be coming down," said Hugh Johnson, chief investment officer at First Albany Corp. "If true, that will make it difficult to have an exciting market."
Wall Street's major indexes ended the week lower. For the week, the Dow fell 73.74, or 0.9 percent. It closed yesterday at 8,203.41.
The Nasdaq composite index had a weekly loss of 24.66, or 1.8 percent, closing at 1,358.85 yesterday.
For the week, the Standard & Poor's 500 index dropped 10.55, or 1.2 percent, to finish at 868.30.
The Russell 2000 index, the barometer of smaller company stocks, had a weekly loss of 1.98, or 0.5 percent, closing at 371.30.
The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 8,227.54, down 92.46 from the previous week. A year ago, the index was at 10,437.84.
STOCK QUOTES/CHARTS/DATA
