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Wall Street banks on Fed
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June 24, 2001: 7:00 a.m. ET
Investors will look to Fed for another rate cut and signs of economic recovery
By Staff Writer Catherine Tymkiw
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NEW YORK (CNNfn) - Better keep that antacid handy. Investors may suffer from heartburn this week as they grapple with the economy and the outcome of the Federal Reserve's meeting on interest rates.
Negative corporate guidance has also been keeping investors on edge and with the June quarter entering the home stretch, uncertainty abounds.
"The big fundamental for financial markets is the economy and earnings beyond interest rates," said Richard Cripps, chief market strategist with Legg Mason Wood Walker.
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Long-term investors should stay the course.
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Peter Cardillo
director of research
Westfalia Investments |
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It seems clear that the Fed will likely cut interest rates for a sixth time in six months but, for the first time this year, there is wider speculation about the move.
"We've set up a situation where a 25 basis point (a quarter percentage point) cut is good but you're looking at a market that's desperate," said Cripps.
According to a poll conducted by Reuters last Wednesday, 17 of the 25 primary dealers that deal directly with the Fed in open market operations expect a quarter-percentage-point cut next week, while eight dealers said they expect a more dramatic half-percentage-point reduction.
Mark Boutote, managing director of Direct Brokerage, says traders at the New York Stock Exchange are betting on a larger rate cut
"That seems to be the talk on the floor now, 50 basis points, instead of 25," Boutote told CNNfn's Market Call.
The Federal Open Market Committee (FOMC), the Fed's monetary policy making arm, meets Tuesday and Wednesday with a decision about interest rates due around 2:15 p.m. ET on Wednesday.
"Obviously they (investors) are going to focus on the Fed but a rate cut is priced in," said Peter Cardillo, director of research with Westfalia Investments. "The focus will be on the economy and signs that the first batch of interest rates are finally taking hold."
It typically takes six to 12 months for the first rate cuts to work their way through the economy. The Fed began cutting rates in January so investors will be looking at any economic data for signs of a recovery.
John Davidson, chief investment officer with Circle Trust Co., likened current economic conditions to last week's solar eclipse in Africa.
"At the depth of darkness, only the fringe of light was visible and I think that's where we are in the economy right now. We're in the depth but we see these fringes of light."
A sluggish week on Wall Street
If last week's performance is any indication of investor sentiment, the outlook remains murky.
"The market is really not going to have a sustainable rally until earnings turn around and we're entering a period of transition," said Davidson. "Iinvestors with patience will come into the market and experience volatility. But they will come in at lower prices than investors who wait on the sidelines until they see earnings turn."
All the major indexes ended the week nearly unchanged, reflecting tempered conviction on the part of investors. Still, analysts believe the markets will continue to grind higher and investors should not panic.
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"Long-term investors should stay the course," advised Westfalia's Cardillo. "No one should be diving into this market with the notion that they'll make fast money because that's not the case."
For the week, the Nasdaq composite index gained a modest 0.3 percent, the Dow Jones industrial average slid 0.17 percent and the S&P 500 advanced 0.9 percent.
"Investors will continue to monitor what happens in the economy because once the economy picks up, earnings will improve," said Cardillo.
But when?
According to First Call, 67 percent or 140 companies in the S&P 500 have issued negative pre-announcements for the June quarter, only one percent ahead of the comparable time period in the first-quarter.
The steadying pace could be signaling a light at the end of the tunnel.
Looking for signs of economic optimism
Investors and analysts are pegging some type of an economic turnaround by the end of 2001 but jitters remain about how much it will recover.
Just last week Federal Reserve Bank of Boston President Cathy Minehan told a Boston research group she thinks there's a good chance the U.S. economy will recover by the second half of this year but it is not cast in stone.
And Richmond Fed President Alfred Broaddus, in separate comments, said the Fed doesn't have much more rate cutting to do after slashing short-term interest rates from 6.5 percent to 4.0 percent in five cuts this year, its most aggressive rate-cutting campaign since the last recession.
"Obviously people are focusing on the FOMC announcement," said Circle Trust's Davidson. "Up until last week I was ready to flip over to 50 basis points (a half percentage point) but we've had some economic news that's been pretty good."
If the economy is in the process of stabilizing, it may be time for the Fed to change its interest rate policy. But recent data have been painting a mixed picture.
In last week's reports, fewer Americans lined up for unemployment benefits but the number of new claims remained relatively high, a sign of further weakness in the job market.
But the Conference Board, a New York-based business research group, said its Index of Leading Indicators rose 0.5 percent in May, its biggest gain since December 1999, after rising 0.1 percent in April.
The Conference Board's index is closely watched because it indicates where
the overall U.S. economy is headed in the next three to six months
And the housing market in the United States lost a little strength in May, according to the Commerce Department, but it was still stronger than Wall Street forecasts.
Reports due this week include indications about existing home sales on Monday, consumer confidence from the Conference Board and new home sales on Tuesday, and Friday will bring the final reading on the gross domestic product (GDP) for the first quarter.
Analysts polled by Briefing.com expect existing home sales to remain unchanged at an annual rate of 5.2 million units. Analysts expect the index of consumer confidence to edge lower to 114 for June from 115.5 in May. And new home sales are forecast to rise to an annual rate of 930,000 units in May from 894,000 units in April.
Wrapping up the week will be the Commerce Department's final report on the first-quarter GDP. The initial reading on the broadest measure of the nation's economy pointed to a 1.3 percent annual growth rate in the quarter, versus a 1 percent rate in last year's fourth quarter.
Economists surveyed by Briefing.com had expected a 1.4 percent growth rate but they expect no change in the final reading from the preliminary 1.3 percent growth rate. 
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