By Nick Godt
The inauguration of President-elect Barack Obama might be the
only boost for Wall Street next week, as a deluge of what are
expected to be mostly bad corporate results and fresh reports on
the state of the housing market starts pouring in.
"The stock market is a forward-looking animal that tends to move
about five months ahead of the real economy, but right now its
actions don't bode well for a recovery until late in the year at
best," said Robert Kavcic, market strategist at BMO Capital
Markets.
With U.S. markets closed Monday for the Martin Luther King
holiday, the trading week will kick off Tuesday. No economic
reports are due that day, but there will be a slew of financial
results, including those from IBM (IBM) and Johnson & Johnson
(JNJ), two blue-chip stocks, and from regional banks, Regions
Financial (RF), State Street (STT) and U.S. Bancorp (USB).
Financial firms were already front and center in the market over
the past week, as the likes of JP Morgan Chase (JPM), Bank of
America (BAC), and Citigroup (C), all posted worse-than-expected
results, with the economic recession further darkening the outlook
for the already-embattled sector.
"Earnings are terrible and outlooks are cloudy," said Jack
Ablin, chief investment officer at Harris Trust. "For financials,
there are more worries ahead in my view."
For the week, the Dow Jones Industrial Average (DJI) slumped
3.7%, the broad S&P 500 (SPX) fell 4.7%, and the tech-heavy
Nasdaq Composite (RIXF) lost 2.7%.
But stocks still rose Friday, for the second consecutive session
of gains, with the Dow ending the session up 68 points at 8,281,
the S&P 500 rising 6 points to 850 and the Nasdaq gaining 17
points to 1,529.
The government late Thursday approved a deal to provide an
additional $20 billion in capitalization for Bank of America and to
guarantee up to $400 billion in losses on real estate loans at both
the Charlotte, N.C. lender and at Citigroup. Separately, Citigroup
said it would split its operations in two.
End of the rebound?
Although the stock market seemed poised to continue its
late-year bounce into January, many market strategists are now
trimming their expectations in the face of much worse-than-expected
economic data, including dismal job losses in December, and the few
earnings reports that have come out so far.
Earnings at S&P 500 companies are now expected to have
tumbled 20.2% in the fourth quarter of last year from the year-ago
period, according to Thomson Financial. Just a week ago,
expectations were for earnings to fall 15.1%.
The ratio of negative to positive pre-announcements has jumped
to 3.6 to 1, its highest level since 2001, during the last
recession.
"And one of the themes for the fourth quarter is that earnings
weakness is spreading," said John Butters, earnings analyst at
Thomson. "During the early stages, most of the weakness came from
financials but now, seven out of the 10 sectors of the S&P 500
are expected to post negative growth."
Firms in traditionally defensive sectors, such as health care,
consumer staples, and utilities are the only ones expected to have
posted any profit gains during the fourth quarter.
Next week, 55 companies from the S&P 500 will report, with a
lot of financial firms' results due out, along with a number of big
names from the tech sector.
Besides IBM on Tuesday, Apple Inc. (AAPL) and eBay Inc. (EBAY)
will report on Wednesday, followed by Google Inc. (GOOG) and
Microsoft Corp. (MSFT) on Thursday.
Other blue-chip stocks due to report are United Technologies
(UTX) on Tuesday, and General Electric Co. (GE) on Friday.
Housing
The housing market, whose demise revealed the bad home loans
that led to the credit crisis and pushed the economy into
recession, will dominate the news on the economic data front next
week.
Wednesday will bring data on mortgage applications from the
Mortgage Bankers Association, and the January housing market index
from the National Association of Home Builders.
On Thursday, December housing starts and building permits, which
are forward-looking indicators, will be released. Also on that day,
investors will continue to monitor a dismal labor market with the
release of weekly jobless claims numbers.
The Obama factor
The inauguration of President-elect Obama on Tuesday could still
provide a needed boost for the market, according to Owen
Fitzpatrick, market strategist at Deutsche Bank.
"The luster around Obama is quite big," he said. "It's like a
light switch: out with the old, in with the new."
Political momentum for the president elect's economic stimulus
plan, now estimated at around $850 billion, might also
accelerate.
"It's now on the horizon," Fitzpatrick said. "The size of the
package is large and it should lessen the impact of the
recession."
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