U.S. Stocks Turn To Fed, Again, And To Jobs

NEW YORK (MarketWatch) -- Investors will again turn to the Federal Reserve next week, in the hope that the central bank delivers another substantial cut in interest rates to further help soothe frayed nerves in the market, while uncertainty about the economy will likely extend through the release of the January jobs report next Friday.

"This week ahead is likely to be a big week for the markets, with lots of important economic news, a Fed meeting and a number of big earnings reports due out," said Michael Sheldon, strategist at Spencer Clarke.

The central bank will meet Jan. 29 to 30 and issue its decision on rates at 2.15 p.m. Wednesday. The market has fully priced in at least a quarter-percentage point cut, and priced in 70% odds that the Fed will cut by half a point, even after delivering an emergency 75 basis-point cut last Tuesday.

Ahead of Wednesday's decision, investors will comb through economic data, starting with December new-home sales on Monday and durable-goods orders on Tuesday.

Wednesday will also bring the initial estimate of the fourth-quarter GDP, which should shed some light on where the economy stands. But all eyes will be on the January jobs report Friday, after news that unemployment had jumped to 5% in December helped fuel concerns about a recession.

"Rising employment will provide the economy with income and allow consumers to keep spending while falling employment will cut into consumer spending, which represents approximately 70% of economic growth," Sheldon added.

A wild ride

Another wild ride in markets over the past week -- a plunge in global markets, an emergency rate cut by the Fed and a $7 billion loss caused by a rogue trader at French bank Societe Generale -- led investors to keep a very cautious tone heading into next week,

"We're looking at a market facing more uncertainty, with a lot of caution going into the weekend," said Marc Pado, market strategist at Cantor Fitzgerald. "Investors are a little nervous because of what happened last Monday."

While U.S. markets were closed Monday, global stocks tumbled with European and Asian markets all losing between 5% and 12%, as concerns mounted that the U.S. economy was headed toward recession.

After sliding 460 points early Tuesday, the Dow Jones Industrial Average finished down 128 points, mostly helped by the Fed stepping in with an emergency rate cut of 75 basis points. This was the largest cut of the key interest rate since 1982 and the Fed's first emergency cut since Sept. 17, 2001.

Also helped by a governmental fiscal-stimulus package and talks of a bailout of distressed bond insurers, the move then helped markets rally for two straight sessions.

But volatility and concerns about financial woes returned Friday. The Dow industrials finished on a loss of 171 points at 12,207, but still finished the week with a gain of 0.9%.

The S&P 500 Index fell 21 points to 1,330 Friday, while it gained 0.4% on the week. The Nasdaq Composite Index lost 34 points to 2,326 Friday and tallied a weekly loss of 0.6%.

Reports

Earnings will likely continue to take a backseat to overarching concerns about the economy, financial woes and monetary policy.

Next week, 120 companies from the S&P 500 will be reporting, including nine Dow components.

On Monday, American Express Co. , McDonald's Corp. and Verizon Communications Inc. will report results. Tuesday will see results from 3M Co. , while Wednesday will see those of Boeing Co. , Merck & Co. and Altria Group . Thursday will bring Procter & Gamble Co.'s report, while Exxon Mobil Corp. slated for Friday.

Earnings too have continued to reflect the heavy pressure of financial firms and their write-downs linked to bad U.S. home loans.

"The shock of the write-downs has been the catalyst for the major declines since the start of the year," said Cantor Fitzgerald's Pado. "From tis point on, we're looking at things as being not quite as traumatic.

"Now the question remains, is it going to get worse? Investors aren't looking for things to get better right away, but at least for the bloodletting to stop."

Fourth-quarter earnings are currently estimated to have fallen 20.5% year on year, compared with expectations of earnings growth of 11% at the start of the quarter and of a 9.4% drop at the end of the quarter Jan. 1, according to Thomson Financial.

"There's no surprise there," said John Butters, analyst at Thomson. "It's all attributable to the financial sector, with many firms missing estimates by a large amount."

With the likes of Citigroup Inc. and Merrill Lynch & Co. posting huge write-downs, the financial sector of the S&P 500 is expected to see a whopping 104% drop in earnings in the fourth quarter.

Without financials, earnings growth for S&P 500 companies is still expected to reach 11.3%, slightly less than the 13.1% forecast at the start of the quarter.

Technology remains the best-performing sector, with earnings there forecast to grow 25%, led by systems software and computer hardware, with performance driven by the likes of Microsoft Corp. and Apple Inc.

The energy sector is the second-best sector, with earnings forecast to grow 18%, while health-care, led by pharmaceuticals firms, is the third best, with earnings seen growing 16%, thanks to the likes of Pfizer Inc. and Johnson & Johnson .

By Nick Godt