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Ready, steady on Wall St.

May 27, 2001
Web posted at: 1730 GMT

By Staff Writer Catherine Tymkiw

NEW YORK (CNNfn) -- This week on Wall Street, investors will be keeping their fingers crossed that the economy will start reaping the benefits from a string of interest rate cuts and that negative corporate guidance may be nearing an end.

And with a spate of economic news hitting the Street, many market participants will have plenty to chew on as they try to gauge how the economy is shaping up after five interest rate cuts by the Federal Reserve.

But investors may only be ready to dip their toes in the water as uncertainty still will rule sentiment over the next few weeks.

"Be prepared for a continuation of negative commentary by companies as they warn about the second quarter," said Ned Riley, chief investment strategist with State Street Global Advisors.

"From a CEO/CFO perspective, unless there has been a dramatic change in (economic) deterioration, many are going to be very cautious about commenting on anything that would imply better prospects ahead," he added.

While many investors have started looking beyond the second quarter, psychology and sentiment drive the day-to-day moves.

"Everybody knows the second quarter is going to be miserable but there's a sliver of optimism on the part of investors that would hope that the commentary would be geared toward a better scenario," Riley said.

Most analysts said optimism has emerged but with no major catalyst to drive the markets higher, wishy-washy trading will likely keep the major indexes locked in a range.

"I think we have set the upper end of a range that we are likely to be in until the fourth quarter," said Bill Meehan, chief market analyst with Cantor Fitzgerald. "The psychology has gotten a little too bullish – if you're an investor, raise some cash and pare back exposure to technology but don't abandon the market."

Tom Gallagher, head of U.S. equities at CIBC World markets, told CNNfn's Market Call, that he expects the market to stall until the second quarter profit warning season passes. (403K WAV) (403K AIFF)

Wall Street takes a breather

As the major indexes continued to show a steady positive performance, analysts said it was not unusual to see a bit of a pullback. In fact, many said it is a healthy sign as the markets transition from a bear phase into a bull phase.

"It's a bit much to expect we're going to rock and roll to new highs," Meehan said. "But I don't see an extraordinary amount of downside, so investors shouldn't worry too much about the ups and downs."

The Nasdaq composite index, which is weighted heavily with technology names, is up more than 35 percent from its lows in April. The index ended Friday down 31.01 points at 2,251.01 but closed out the week with a 2.4 percent gain.

The Dow Jones industrial average fell 117.05 points to 11,005.37 on Friday and shed 2.6 percent for the week. The S&P 500 slid 15.27 points to 1,277.90 on Friday and logged a 1.08 percent decline for the week.

Analysts were optimistic about how the markets have behaved. "The activity and action in the market is very positive and I think the bias of this market is up," Riley said.

Investors have started believing the worst was over or nearly over and now hope companies will start giving some positive guidance. Many market participants also expect to start seeing some life injected into the economy after the string of interest rate cuts by the Fed.

Typically it takes anywhere from six to 12 months for the first rate cuts to lace their way through the economy. The Fed has cut rates five times in five straight months.

The Federal Open Market Committee, the Fed's monetary policy making arm, will meet on June 26-27. With a mixed economic outlook, analysts said investors may be a bit skittish that the Fed will temper its bias.

"We're going to have more people talking about the Fed becoming less aggressive, which will be neutral or negative for the market because the market has been feeding off low interest rates," Riley said. "I don't think the Fed commentary is going to be as predictable and direct as the last meeting."

Digesting the data

Investors will have plenty to of economic and second-quarter profit guidance to chew on this week.

If the economy is in the process of stabilizing, it may be time for the Fed to change its interest rate policy. Data had been pointing to some underlying strength propping up the economy.

Analysts said the rumblings of economic strength may give the Fed cause to pause.

"Some of the governors are going to challenge another 50 basis point (half a percentage point) reduction that many people would like," said Riley. "I think they'll be guarded in their commentary and that may be one of the catalysts for the market to correct."

But the jury is still out on whether or not this strength is sustainable.

In last week's economic reports, durable goods orders fell more than forecast in April while a gauge of consumer confidence ticked lower.

Separately, existing home sales edged lower, roughly in line with what economists had expected, and the latest numbers on gross domestic product, the broadest measure of the U.S. economy, showed few surprises.

Those reports came one day after Federal Reserve Chairman Alan Greenspan said the economy still faces trouble and left the door open for more interest rate cuts.

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Reports due this week include indications about consumer confidence from the Conference Board on Tuesday, the unemployment rate and the National Association of Purchasing Management (NAPM) index of the pace of manufacturing on Friday.

Analysts polled by Briefing.com expect the index of consumer confidence to rise to 110 for May from 109.2 in April. Analysts expect the Labor Department's report on unemployment to edge up to 4.6 percent in May from 4.5 percent in April. And the NAPM index is expected to inch up to 43.7 percent in May from 43.2 percent in April, according to analysts polled by Briefing.com.

The number of new U.S. jobless claims rose to 407,000 for the week ended May 19 from a revised 392,000 the prior week, the Labor Department reported last week. Analysts surveyed by Briefing.com had forecast new claims of 390,000.

And sales of new homes showed their biggest decline in four years in the United States last month, according to the Commerce Department, coming in much weaker than Wall Street economists had expected.

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With two-thirds of the second-quarter already completed, analysts expect companies to have enough information to start issuing guidance about current and future growth prospects.

But Chuck Hill, director of research with First Call, said the pre-announcements may not hit with full force until mid-June.

"We're still not in the peak time yet," Hill said. "It won't be until we're into the second or third week of June before it starts heating up but we're already running ahead of where we were in the record-setting first quarter."

He noted that negative pre-announcements already are running 12 percent ahead of the comparable time in the first-quarter – and this is worrisome.

"We're a bit concerned about where this may go when we get into the peak weeks," Hill said.

While negative news seems to be outpacing positive indicators, analysts are not discouraged – the tide is turning and that should bode well for the markets.

"I don't think the visibility is improving but I think stock prices have improved based upon the acknowledgement by investors that fundamentals couldn't get any worse and the major deterioration is taking place now," State Street's Riley said.