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Wall St. waits for Fed
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August 19, 2001: 7:00 a.m. ET
With corporate earnings season over, markets look to economy for relief
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - U.S. stocks will look to the Federal Reserve for a reason to recover this week after sinking on continuing corporate profit woes and uncertainty about the state of the world's largest economy.
Stocks tumbled Friday after Dell Computer (DELL: Research, Estimates) cut profit forecasts following a quarter of sinking earnings, Ford Motor (F: Research, Estimates) announced job cuts and lowered profit targets, and Gap (GPS: Research, Estimates) warned investors its third-quarter earnings would miss expectations.
The Nasdaq composite index fell 63.31 points, or 3.3 percent, to 1,867.01, its worst finish since April 10, when the index closed at 1,852.03. On the week, the index declined 4.6 percent.
The Dow Jones industrial average slumped 151.74, or 1.5 percent, to 10,240.78, widening its weekly loss to 1.7 percent. A broader index, the Standard & Poor's 500, slid 19.69, or 1.7 percent, falling 2.4 percent over the last five sessions.
"We opened up the floodgates of bad news," Art Hogan, chief market analyst at Jefferies & Co., told CNNfn's Money Gang program Friday. "The good news is, a lot of this is behind us, and we probably overreacted on the downside."
The market could react to the upside this week, as the Federal Reserve is almost certain to cut interest rates again on Tuesday. Some forward-looking economic data will also be released that could show some stabilization in the economy as corporate earnings season draws to a close.
"We tend to exaggerate our moves, especially in the summertime," Hogan said. "We'll see the same sort of upward movement [next week] and retrace half of this [downward] move on Monday and Tuesday."
Click here for more on the Fed and rates
The big news this week will be made by the Fed, which meets Tuesday to discuss whether or not to cut short-term interest rates for the seventh time this year.
Most economists expect the Fed to cut its target for the federal funds rate, an overnight bank lending rate, a quarter-percentage point to 3.50 percent. It has slashed rates from 6.50 percent to 3.75 percent so far in 2001 in an effort to keep money moving through the economy and avoid a recession.
"[Fed Chairman Alan Greenspan] wants to get the economy off the ground, and I expect the Fed to move ahead with another quarter-point cut next week," said Bill Cheney, chief economist at John Hancock Financial Services.
Possibly more important than what the Fed does Tuesday is what it says about its future plans. With every rate cut this year, the Fed has said it thought the risks for the economy continued to be toward weakness rather than toward inflation, indicating it could cut rates again if necessary.
"From their point of view, there's no inflation danger," said David Blitzer, chief investment strategist at Standard & Poor's. "The main risk is to slow growth, and they should keep cutting rates."
Click here for CNNfn.com's earnings page
Unfortunately, analysts say Tuesday's expected rate cut has been priced into the stock market, which will probably yawn at a cut lower than a half-percentage point and respond negatively in the unlikely event the Fed takes no action.
"The focus for the stock market is more on economic recovery," said Scott Brown, chief economist with Raymond James & Associates.
The market is still looking for signs that a year-long economic slowdown is ending. Businesses have cut production and shed hundreds of thousands of jobs during the slowdown, but such actions haven't shielded them from a profit meltdown.
The second quarter, in which corporate earnings fell by about 17 percent from a year ago, could be the worst quarter for profits since the last U.S. recession, according to earnings tracker First Call. And the future is equally grim.
"To put this into perspective, last year at this point in the quarter we had 52 negative pre-announcements," First Call said in an article on its Web site. "Today, we have 317."
Click here for CNNfn's economic calendar
But recent reports of falling prices, continuing strength in the housing market, a possible recovery in the labor market, stabilization in manufacturing and resilient consumer confidence have painted a more optimistic picture of the economy's health.
On Monday, the Conference Board, a New York-based business research group, reports its Index of Leading Indicators for July, a broad-based measure of the future health of the economy. Analysts surveyed by Briefing.com expect indicators to rise 0.3 percent, compared with a 0.3 percent gain in June.
The only other economic data to be released in a quiet week are reports on July orders for durable goods and new home sales.
The season for corporate earnings reports is nearly done, though several retailers report this week, including discount retailers K-Mart (KM: Research, Estimates) and Target (TGT: Research, Estimates).
Target, which reports Tuesday, is expected to report earnings of 30 cents a share, according to First Call, up from 28 cents a share a year ago. K-Mart, which reports Thursday, is expected to report a loss of 4 cents a share, down from earnings of 5 cents a share a year ago.
Retailers have reported mixed results this earnings season, with discounters doing somewhat better than specialty retailers as consumers tightened their belts in an uncertain economy. 
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Special report: Eyes on the Fed
Nasdaq, Dow see big losses - Aug. 17, 2001
Ford cutting managers, lowers targets - Aug. 17, 2001
U.S. trade gap rises slightly in June - Aug. 17, 2001
Dell Computer meets on 2Q - Aug. 16, 2001
Gap Inc. sees 43% drop in 2Q, beats by a penny - Aug. 16, 2001
U.S. CPI index falls in July - Aug. 16, 2001
U.S. jobless claims move lower - Aug. 16, 2001
U.S. business inventories fall in June - Aug. 15, 2001
U.S. retail sales flat in July - Aug. 14, 2001
Retailers post mixed July sales, discount chains higher - Aug. 9, 2001
Fed cuts interest rates a quarter point; sixth cut in 2001 - June 27, 2001
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