By Nick Godt
Investors are poised to start next week eager for plans from the
government to boost the economy and rescue the financial system,
which could help bulls cement a nascent February rally in
stocks.
Hopes that the market has already priced in much of a dismal
outlook for the economy this year were also evident Friday, as
stocks rallied past news that January saw the biggest loss of jobs
since 1974.
"The market is possibly looking at what we see today and
thinking that we can't get much worse than that," said Paul Nolte,
director of investments at Hinsdale's Associates. "It's not yet
expecting that things will get better, but at least not much
worse."
On Friday, the Dow Jones Industrial Average (DJI) jumped 217
points, or 2.7%, to end at 8,280. The S&P 500 index (SPX)
gained 22 points, or 2.7%, to 868, while the Nasdaq Composite
(RIXF) rallied 45 points, or 2.9%, to 1,591.
After posting their worst January performance on record, stocks
entered the month of February on a positive note. For the week, the
Dow rose 3.5%, the S&P gained 5.2%, and the Nasdaq jumped
7.8%.
Part of the rally was supported by hopes that the Obama
administration's economic stimulus plan was close to being passed
by Congress. Late Friday, senators reached a tentative deal on a
$780 billion plan, clearing the way for a vote over the
weekend.
And on Monday, Treasury Secretary Timothy Geithner is expected
to unveil the administration's plans to rescue ailing banks and
hopefully tamp down the credit crisis that has crippled the
financial system and the global economy the past year and a
half.
While outlines of the plan remain sketchy, many holders of
financial stocks fear that potential moves to nationalize banks
could reduce their stake or wipe them out altogether.
"There remains an outside chance the federal government could
move to nationalize the banks or commit additional capital and thus
require banks to halt interest payments on preferred shares or at
the very least, dilute existing equity shareholders," said Robert
Pavlik, market strategist at Oaktree Asset Management.
Yet, absent of the exact details of the Treasury's prescription
for change, financial shares still rallied over the past week on
Wall Street, a bullish sign for the market, according to
Pavlik.
"The market's turnaround on a lack of concrete news is
interesting," he said. "We believe it points to the hope that the
Street has that investor optimism will once again return to the
levels we saw back in November."
Depressed earnings
The market also seemed not overly concerned about
weaker-than-expected earnings and even some drastically weaker
outlooks from companies posting their quarterly results.
With 309 companies from the S&P 500 having now reported,
fourth-quarter earnings are expected to have slumped more than 40%
from the year-ago period. This would mark the weakest growth rate
since at least 1998, according to Thomson Financial, which began
tracking the data that year.
Just a week ago, earnings were expected to have fallen 35% in
the quarter.
The outlook for the rest of the year has also weakened, with a
drop of more than 28% now expected for the first quarter, a roughly
25% decline in the second quarter, followed by a drop of 10% in the
third quarter.
Most forecasters still expect modest growth for the fourth
quarter. But that view currently seems in jeopardy, warns John
Butters, earnings analyst at Thomson.
Next week, another 60 companies from the S&P 500 are
expected to report, including one Dow component, Coca-Cola Co.
(KO), on Thursday.
On Monday, homebuilder Beazer Homes (BZH), chemicals maker Rohm
& Haas (ROH) and home-appliance maker Whirlpool (WHR) are
slated to report results.
On Tuesday, results are due from telecom player Qwest
Communications (Q) and chip-equipment maker Applied Materials
(AMAT), followed by results from the bank Credit Suisse (CS) on
Wednesday.
On Thursday, insurance group Aetna (AET), hotel operator
Marriott (MAR) and media giant Viacom (VIA) are due to post their
quarterly reports. Friday, PepsiCo (PEP) will check in.
Economic blues
Next week will be light on economic reports, except on Thursday,
when the government will report its January tally of retail
sales.
Dismal sales and outlook from U.S. retailers failed to prevent
those stocks from rallying last week, as investors had already
priced in very bad numbers.
On Tuesday, Federal Reserve Chairman Ben Bernanke is expected to
testify on the central bank's lending programs to ailing financial
institutions. That same day, wholesale inventories and sales data
for December are due.
On Wednesday, the government will report trade data for
December.