Meanwhile, in the Present, It’s Earnings vs. the Fed
The U.S. stock market pushed to new highs early last week before running into modest selling Thursday and Friday. The Dow Jones industrial average finished the week at 9,064.62, down 102.88 points, or 1.1%, from the previous Friday.
The Nasdaq composite index inched up slightly for the week, to 1,868.96 by Friday, but was off 2.5% from Wednesday’s record.
Nervous Wall Streeters sounded the usual notes of caution last week, arguing that with the market so strong this year--the Dow is up 14.6% since Jan. 1--a pullback is way overdue.
And a growing chorus of economists, market strategists and Federal Reserve officials is warning that it is increasingly likely that the Fed will raise short-term interest rates in the second half of the year because the U.S. economy shows few signs of slowing.
Brokerage Salomon Smith Barney, which had previously expected a Fed rate hike in 1999, on Friday advised clients to plan for an increase by the fourth quarter of this year. Rising long-term bond yields last week, along with rising gold prices, hinted that some financial market sectors are already beginning to discount a Fed credit-tightening move.
For the stock market overall, however, the focus in recent weeks has been more on first-quarter corporate earnings. Expectations for earnings had been depressed--so much so that, as a group, the companies in the blue-chip Standard & Poor’s 500-stock index were expected to show no growth in earnings versus the first quarter of 1997. Instead, with more than two-thirds of the S&P; companies reporting results so far, research chief Chuck Hill at earnings tracker First Call in New York said S&P; 500 earnings are on course to rise about 3% compared with a year earlier.
While that would be the weakest quarter since 1991, it’s still better than expected, Hill concedes. But then, for the last four years quarterly earnings have beaten analysts’ estimates by about the same amount (2.6 percentage points, on average). So the “surprise” this quarter is “just the normal corrective bias,” Hill says.
Still, given the pressure on blue-chip companies’ profits from Asia’s woes, the strong dollar and rising U.S. wage levels, isn’t 3% respectable earnings growth? Not to Douglas Cliggott, investment strategist at J.P. Morgan Securities in New York. He reduced stocks’ weighting in his model portfolio to 50% on Friday from 60% (the rest is in bonds and cash), citing the market’s tremendous advance this year in the face of weak overall earnings gains.
Could the first quarter be an anomaly, leading to a resurgence of earnings growth in the rest of the year? That’s the bullish stance. And with nervousness rising about the Fed’s plans, the market may need all the help it can get from corporate earnings.
