Key Events to Set Mood on Wall St.
Some of the nation’s biggest investment firms are goading the Federal Reserve to cut interest rates this week--or at least to signal that a cut is coming later in the year.
But the majority of professional Fed watchers don’t believe that the central bank plans to accommodate Wall Street. And that is raising questions about the stock market’s ability to keep its recent rebound alive.
At the same time, Wednesday’s deadline for executives of the largest U.S. companies to certify their firms’ financial results could be a catalyst for another market rally, if no significant earnings restatements are announced, some analysts say.
The Fed’s meeting Tuesday and the financial-certification deadline Wednesday will be key in setting the mood on Wall Street this week and perhaps for the rest of the month, barring some unforeseen geopolitical event.
Stocks have rebounded over the last three weeks from the five-year lows reached on July 23. The blue-chip Standard & Poor’s 500 index jumped 5.1% last week and is up nearly 14% from its closing low on July 23.
The average U.S. stock mutual fund rose 3.8% last week, according to fund tracker Morningstar Inc. Year to date, however, the average U.S. fund still is mired in red ink, down 20.3%.
The stock market gained steam last week after a number of major investment firms said they expect the Fed to further lower its benchmark short-term interest rate by year’s end, even though that rate--at 1.75%--already is at a 40-year low.
With recent economic data strongly suggesting that the economic recovery is fading, investment titans including Goldman Sachs & Co., Lehman Bros. and Deutsche Bank Securities have told clients that they expect the Fed to ease credit by the end of the year.
Morgan Stanley’s chief U.S. economist, Richard Berner, went further Friday, saying he expects the Fed to slash its so-called federal funds rate target by a half-point on Tuesday, to 1.25%.
That would cut banks’ prime lending rate from 4.75% to 4.25%, because most banks peg that rate three percentage points above the federal funds rate. If the prime falls, many firms and consumers would see borrowing costs decline.
A drop in the Fed’s rate also would push rock-bottom yields on money market accounts even lower, potentially driving some of that cash into the stock market in search of better returns.
Yet most Fed watchers see no chance of a Fed cut this week, or even this year, barring a deep slump in economic activity.
A recent Reuters poll of 22 big Treasury bond dealers found that 17 expect no change in rates through the end of 2002.
Most bond dealers aren’t even optimistic about the chance that the Fed could take a halfway step on Tuesday. That step would be for Chairman Alan Greenspan and cohorts to change their rate “bias” from neutral to one that suggests the economy could be weakening enough to justify future rate cuts.
The majority of bond dealers expect the Fed to maintain its neutral stance, according to a Bloomberg News survey.
Ethan Harris, co-chief economist at Lehman Bros. in New York, believes that the majority is wrong. He expects the Fed to change its bias Tuesday to allow for rate cuts this fall, and then sees Greenspan following through with a quarter-point cut at the next policy meeting on Sept. 24.
“Once they move into action they want to be decisive,” Harris said. He expects the Fed’s key rate to fall to 1% by year’s end, in a succession of reductions.
A big question is whether the stock market’s rally since July 23 has rested heavily on an assumption of still-lower interest rates. If so, and the Fed balks, it risks triggering another stock sell-off, some experts warn.
“It is unlikely the Fed will risk disappointing the markets, with sentiment being as fragile and volatile as it is,” investment firm Bridgewater Associates said in a note to clients Friday. “With the stock market showing some signs of stability in the last few days, a significant jolt of liquidity from the Fed could be what finally turns the tide.”
Bridgewater expects the Fed to cut rates at least a quarter-point on Tuesday.
Even if the Fed holds steady, the stock market could be buoyed, at least temporarily, if the Wednesday deadline for corporate financial certifications passes without significant incident, some say.
As of Friday, the majority of chief executives at the largest U.S. companies still hadn’t filed the required statements with the Securities and Exchange Commission affirming that their companies’ recent financial results are accurate.
Most firms are expected to file the statements Tuesday or Wednesday. The deadline is 2 p.m. PDT on Wednesday.
Telecom firm WorldCom Inc., which has filed for bankruptcy protection, on Thursday gave investors a sobering reminder that the extent of the accounting scandals at U.S. companies may not yet have been fully revealed. WorldCom said it uncovered an additional $3.3 billion in accounting errors, bringing the total to more than $7 billion.
But on Friday, Wall Street reacted with a shrug: The S&P; 500 index and the Dow Jones industrials eked out modest gains.
Many investors have been expecting some major companies to restate their earnings before Wednesday, to clear the books of questionable accounting so CEOs can certify the results without the threat of lawsuits.
If restatements aren’t announced, however, a “relief” rally could follow on Wall Street.
Because investors have been expecting bad news related to the certifications, “If we don’t get that bad news, it ought to be a homerun” for stocks, said Tom Sowanick, senior fixed-income research chief at Merrill Lynch & Co. in New York.
