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The Coming Week: Cautious Pessimism
04/05/08 - 11:34 AM EDT
por Nat Worden journal TheStreet.com
In a lull before Wall Street gets flooded with first-quarter earnings, investors will be praying next week that stocks have caught up with reality this time.
The market was blindsided by earnings in the fourth quarter. At the start of the period, analysts were expecting year-over-year earnings growth for the S&P 500 of 11.5%, according to Thomson Financial, and they wound up with a decline of more than 25%. By the time all the results were on the books, the S&P had lost 13% of its value.
Now, analysts are predicting a 12.2% drop in earnings for the first quarter of 2008. On New Year's Day, they were forecasting a gain of 5.7%, but with fears of recession mounting along with continued turmoil in the financial markets, some are wondering if Wall Street still has not come to grips with its predicament.
"The numbers have come lower, but I'm still expecting more revisions," says Subodh Kumar, chief investment strategist with Subodh Kumar & Associates. "The markets are seeing analysts chasing earnings down, which means market volatility is likely to continue."
Kumar says second-quarter expectations should be lower as well. Analysts are now expecting a 2.9% drop for that period.
"I'm looking for roughly a 15% decline in earnings for the first half of the year," he says.
The stock market is now operating on hopes that the near bankruptcy of Bear Stearns(BSC - Cramer's Take - Stockpickr) in mid-March drained the panic off Wall Street. The Federal Reserve's willingness to backstop a major investment bank and expand the reach of mortgage giants Fannie Mae (FNM - Cramer's Take - Stockpickr) and Freddie Mac (FRE - Cramer's Take - Stockpickr) has reassured investors that the central bank is willing to do whatever it takes to keep the financial system from being torn asunder.
"We were on the brink," says T.J. Marta, fixed income strategist with RBC Capital Markets. "The Fed pulled us back."
Last week, stocks gained with the Dow Jones Industrial Average adding 3.2%, the S&P 500 up 4.2% and the Nasdaq Composite up 4.9%. Meanwhile, since JPMorgan Chase (JPM - Cramer's Take - Stockpickr) agreed to acquire Bear Stearns on March 16, the Philadelphia Banking Index has gained 9.4% and the S&P Retail Index has added 11%.
Optimists looking for a bottom in stocks note that financials and consumer discretionary stocks led the markets lower and will likely lead a turnaround when it comes. Pessimists point to persistently wide spreads in the credit markets along with a bevy of dismal economic indicators as a sign that the pain is likely to get worse before it gets better.
Last week, the government reported the third straight month of decline for the U.S. job market, with nonfarm payrolls losing 80,000 jobs in March. The expectations index in the Conference Board's consumer confidence survey has hit a 30-year low, and retail and auto sales continue to dwindle.
Meanwhile, the American Bankers Association recently reported that consumer-credit delinquencies in the fourth quarter were at their highest levels in nearly 16 years, as borrowers continue to fall behind on auto loans. It's forecasting that delinquencies will continue to rise in the first half of 2008, warning that "no relief for consumers is in sight."
The Fed will release the minutes from its March meeting on Tuesday, leaving investors to scour the report for signs of what the central bank will do with interest rates in April. After Friday's jobs disappointment, the fed funds futures market was recently pricing in a 38% chance of a half-point cut and a 62% chance of a quarter-point cut
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