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April 18, 2005
Change in Wall St. Sentiment Underlines Economic Fears[size=-1]By JONATHAN FUERBRINGER [/size]
fter last week's market plunge - when America's three main stock gauges fell more than 3 percent - Wall Street and unusually nervous individual investors are looking to the flood of earnings reports this week to see how optimistic corporate America is in its outlook for the economy..
Almost a third of the companies in the Standard & Poor's 500-stock index and almost half the 30 companies that make up the Dow Jones industrial average are to report earnings for the first three months of the year. But more importantly, many of them will comment on the financial quarters ahead and could either counter or reinforce the current pessimism about the economy.
Among the big names are Intel, a bellwether for the already struggling technology sector, whose shares fell 5 percent last week, and Caterpillar, a company whose earnings and stock price are hurt when economic grow slows. Its stock plunged nearly 8 percent.
But early earnings warnings from companies like General Motors and Ford have already discouraged investors, and I.B.M.'s surprise earnings shortfall last week was one reason that stocks dropped so sharply. And while earnings growth for the quarter is expected to be respectable, that growth is likely to be well below the pace of last year.
Whether or not the answer on the economic outlook from corporate executives is positive, it is clear that the mood of the investors has changed markedly. Investors finally seem to believe that high crude oil and gasoline prices are curtailing consumer spending, slowing economic growth and cutting into corporate earnings.
The suddenness of this shift, based on just a few new economic reports last week, is probably why the market fell so sharply. It had its worst week since August, and all three main market gauges are at new lows for the year.
"I'm nervous," said James W. Paulsen, chief investment officer at Wells Capital Management. "Although the market sold off earlier this year and had a sharp decline in the beginning of 2003, this feels a little bit different. Maybe it's the violence of it."
Only six weeks ago, on March 4, the Dow Jones industrials stood just 59 points from 11,000 and both the Dow and the S.& P. 500 were at their highest levels since the summer of 2001.
Investors were worried then about economic growth being a little too strong and emerging inflationary pressures. Now, the Dow is just 87 points from 10,000 and the two gauges are on the verge of giving up all the gains since the election in November.
The shift in mood and economic outlook has been so swift that Federal Reserve officials appear to have been caught flat-footed.
In the minutes released last week from the March 22 meeting of Fed policy makers, panel members talked of solid job growth and capital spending and expressed concern about inflationary pressures.
Since then, it has been reported that job growth slowed in March and that retail sales were much weaker than expected last month. The United States' record trade deficit with the rest of the world in February also showed that American exports were sluggish.
Even if the market stabilizes, it is not clear that it can get back onto a track to new highs. That is because stocks are falling now on a surge in fears of slower economic growth. But if that concern passes, then investors are likely to be faced with the consequences of stronger growth: inflation pressures and higher interest rates from the Federal Reserve.
"We don't have a lot of evidence that things are terrible, yet," said Thomas McManus, equity strategist at Banc of America Securities.
He said that the stock decline so far had not changed his forecast of a 7 percent return, including dividends, for the S.& P. 500 over the next 12 months. But, he added, "That certainly is not enough to be considered a compelling reason to buy stocks."
A drop in oil and gasoline prices would reduce fears of slowing growth and maybe calm the stock market. But last week, the price of crude oil for May delivery plunged 5.3 percent to $50.49 a barrel and the Dow dropped 3.6 percent, the S.& P. 500 fell 3.3 percent, and the Nasdaq composite index lost 4.6 percent. A rebound in foreign markets, where some benchmark stock gauges dropped more than 4 percent last week, could help confidence, but foreign investors usually look to Wall Street to stabilize a global fall in the markets. The recent drop in longer-term interest rates, with the yield on the Treasury's 10-year note back down to 4.24 percent Friday. could help.
Mr. Paulsen of Wells Capital Management is betting on earnings. "Between now and the next jobs report, it will have to be earnings to stabilize the market," he said.
The next reading on the views of Federal Reserve policy makers on the strength of the economy does not come until their meeting on May 3. Reassurances on both growth and inflation could allay investors' fears.
The next important data on economic growth - the April unemployment report - is not due until May 6. The two inflation reports scheduled this week, the Producer Price Index and the Consumer Price Index, could have little impact if they come in as expected.
So until May - except for a decline in oil prices - there does not seem to be much that could give stocks a lift besides good earnings.
Based on current forecasts, earnings in the first quarter already look better than expected but still smaller than the 19.7 percent in the fourth quarter of 2004. The Wall Street consensus is that profits for the companies in the S.& P. 500 index will increase 8.6 percent, compared with the first quarter of 2004, up from an 8.2 percent prediction on April 1, according to Thomson Financial. The forecast for the second quarter, however, has dropped to 7.6 percent, from 8.8 percent. The forecasts for the third quarter, 15.8 percent, and the fourth quarter, 12.3 percent, have both moved higher.
A lot of the bad earnings news, from G.M. and Ford for example, is already factored into the market. Without these two companies, the first-quarter earnings forecast would be at 11 percent. But negative surprises are still a risk, like the one from I.B.M. last week, which set off the third - and worst - day of the sell-off Friday.
Mr. McManus of Banc of America Securities is cautious about earnings over the next couple of quarters. "With interest rates expected to rise, and crude oil and gasoline prices still high," he said, "it seems to me that the same conditions that caused earnings to slow are still there."
Mr. Paulsen said one positive is that "it will be more difficult this week to have a negative surprise because of how far you took expectations down last week," adding, "The impact of a positive surprise could be greater than it would have been."
The sharp decline of the market itself, and a surge in bearish sentiment among individual investors, could also be laying the groundwork for a rebound.
The American Association of Individual Investors' reading of bullish market sentiment is at its lowest since September 1992 after plunging last week past the recent low of February 2003.
But it was just three weeks from that February low in sentiment that the stock market began the big rally that resulted in the 26.4 percent leap in the S.& P. 500 that year, ending a three-year decline.
"Generally when there are no bulls in the market," said William E. Rhodes, chief investment officer of Rhodes Analytics in Boston, "the market hits a bottom."
April 18, 2005
Change in Wall St. Sentiment Underlines Economic Fears[size=-1]By JONATHAN FUERBRINGER [/size]
Almost a third of the companies in the Standard & Poor's 500-stock index and almost half the 30 companies that make up the Dow Jones industrial average are to report earnings for the first three months of the year. But more importantly, many of them will comment on the financial quarters ahead and could either counter or reinforce the current pessimism about the economy.
Among the big names are Intel, a bellwether for the already struggling technology sector, whose shares fell 5 percent last week, and Caterpillar, a company whose earnings and stock price are hurt when economic grow slows. Its stock plunged nearly 8 percent.
But early earnings warnings from companies like General Motors and Ford have already discouraged investors, and I.B.M.'s surprise earnings shortfall last week was one reason that stocks dropped so sharply. And while earnings growth for the quarter is expected to be respectable, that growth is likely to be well below the pace of last year.
Whether or not the answer on the economic outlook from corporate executives is positive, it is clear that the mood of the investors has changed markedly. Investors finally seem to believe that high crude oil and gasoline prices are curtailing consumer spending, slowing economic growth and cutting into corporate earnings.
The suddenness of this shift, based on just a few new economic reports last week, is probably why the market fell so sharply. It had its worst week since August, and all three main market gauges are at new lows for the year.
"I'm nervous," said James W. Paulsen, chief investment officer at Wells Capital Management. "Although the market sold off earlier this year and had a sharp decline in the beginning of 2003, this feels a little bit different. Maybe it's the violence of it."
Only six weeks ago, on March 4, the Dow Jones industrials stood just 59 points from 11,000 and both the Dow and the S.& P. 500 were at their highest levels since the summer of 2001.
Investors were worried then about economic growth being a little too strong and emerging inflationary pressures. Now, the Dow is just 87 points from 10,000 and the two gauges are on the verge of giving up all the gains since the election in November.
The shift in mood and economic outlook has been so swift that Federal Reserve officials appear to have been caught flat-footed.
In the minutes released last week from the March 22 meeting of Fed policy makers, panel members talked of solid job growth and capital spending and expressed concern about inflationary pressures.
Since then, it has been reported that job growth slowed in March and that retail sales were much weaker than expected last month. The United States' record trade deficit with the rest of the world in February also showed that American exports were sluggish.
Even if the market stabilizes, it is not clear that it can get back onto a track to new highs. That is because stocks are falling now on a surge in fears of slower economic growth. But if that concern passes, then investors are likely to be faced with the consequences of stronger growth: inflation pressures and higher interest rates from the Federal Reserve.
"We don't have a lot of evidence that things are terrible, yet," said Thomas McManus, equity strategist at Banc of America Securities.
He said that the stock decline so far had not changed his forecast of a 7 percent return, including dividends, for the S.& P. 500 over the next 12 months. But, he added, "That certainly is not enough to be considered a compelling reason to buy stocks."
A drop in oil and gasoline prices would reduce fears of slowing growth and maybe calm the stock market. But last week, the price of crude oil for May delivery plunged 5.3 percent to $50.49 a barrel and the Dow dropped 3.6 percent, the S.& P. 500 fell 3.3 percent, and the Nasdaq composite index lost 4.6 percent. A rebound in foreign markets, where some benchmark stock gauges dropped more than 4 percent last week, could help confidence, but foreign investors usually look to Wall Street to stabilize a global fall in the markets. The recent drop in longer-term interest rates, with the yield on the Treasury's 10-year note back down to 4.24 percent Friday. could help.
Mr. Paulsen of Wells Capital Management is betting on earnings. "Between now and the next jobs report, it will have to be earnings to stabilize the market," he said.
The next reading on the views of Federal Reserve policy makers on the strength of the economy does not come until their meeting on May 3. Reassurances on both growth and inflation could allay investors' fears.
The next important data on economic growth - the April unemployment report - is not due until May 6. The two inflation reports scheduled this week, the Producer Price Index and the Consumer Price Index, could have little impact if they come in as expected.
So until May - except for a decline in oil prices - there does not seem to be much that could give stocks a lift besides good earnings.
Based on current forecasts, earnings in the first quarter already look better than expected but still smaller than the 19.7 percent in the fourth quarter of 2004. The Wall Street consensus is that profits for the companies in the S.& P. 500 index will increase 8.6 percent, compared with the first quarter of 2004, up from an 8.2 percent prediction on April 1, according to Thomson Financial. The forecast for the second quarter, however, has dropped to 7.6 percent, from 8.8 percent. The forecasts for the third quarter, 15.8 percent, and the fourth quarter, 12.3 percent, have both moved higher.
A lot of the bad earnings news, from G.M. and Ford for example, is already factored into the market. Without these two companies, the first-quarter earnings forecast would be at 11 percent. But negative surprises are still a risk, like the one from I.B.M. last week, which set off the third - and worst - day of the sell-off Friday.
Mr. McManus of Banc of America Securities is cautious about earnings over the next couple of quarters. "With interest rates expected to rise, and crude oil and gasoline prices still high," he said, "it seems to me that the same conditions that caused earnings to slow are still there."
Mr. Paulsen said one positive is that "it will be more difficult this week to have a negative surprise because of how far you took expectations down last week," adding, "The impact of a positive surprise could be greater than it would have been."
The sharp decline of the market itself, and a surge in bearish sentiment among individual investors, could also be laying the groundwork for a rebound.
The American Association of Individual Investors' reading of bullish market sentiment is at its lowest since September 1992 after plunging last week past the recent low of February 2003.
But it was just three weeks from that February low in sentiment that the stock market began the big rally that resulted in the 26.4 percent leap in the S.& P. 500 that year, ending a three-year decline.
"Generally when there are no bulls in the market," said William E. Rhodes, chief investment officer of Rhodes Analytics in Boston, "the market hits a bottom."
