Investors' recent optimism wanes ahead of earnings


Published: Monday, January 12, 2009 at 6:01 a.m.
Last Modified: Monday, January 12, 2009 at 12:29 a.m.

NEW YORK Coming off its worst week since November, Wall Street is now wondering if its late 2008 optimism about the economy was misguided or at least premature.

The beginning of companies' fourth-quarter earnings reports this week will be more anxiety-provoking than usual for investors after Alcoa Inc. and Intel Corp. warned last week they're being hit hard by the recession. And the week's economic news, including the Federal Reserve's region-by-region assessment of business conditions, will be more worrisome after word Friday that the unemployment rate soared to a 16-year high of 7.2 percent during December.

Last week's news wasn't particularly surprising, but it was nonetheless unsettling to a market that had appeared to be starting a recovery from months of horrendous selling. The Dow Jones industrials fell 4.8 percent for the week, their biggest percentage loss since the week ended Nov. 21. The Standard & Poor's 500 index slid 4.5 percent and the Nasdaq composite index lost 3.7 percent.

To be sure, the S&P 500 is still up 18.3 percent from its Nov. 20 low, and last week's selling could have been worse. But, said Joe Heider, president of Dawson Wealth Management in Cleveland, "You're seeing volatility return to the market as a result of some of these numbers being much worse than expected."

Alcoa, which releases its fourth-quarter results today, said it would cut 13,500 jobs, or 13 percent of its work force. The aluminum producer has been hurt by falling demand as the recession spreads overseas. And chip maker Intel, which reports its earnings Thursday, lowered its fourth-quarter revenue forecast for a second time.

Investors took the bad corporate news, compounded by Wal-Mart Stores Inc.'s lowering its fourth-quarter forecast due to weak holiday sales, as a sign that their recent optimism might not have been justified.

"I think investors were implicitly assuming that the very worst news about the economy would be in the fourth quarter of 2008," said Chris Probyn, chief economist at State Street Global Advisors. "We were hoping that the first quarter would show signs that the pace of deterioration was slowing down and now there is some issue of whether we'll see that."

Corporate warnings have also made it harder for investors to keep shrugging off bad economic numbers. The fear on the Street is that the economy won't turn around anytime soon if companies are struggling.

On Friday, stocks faltered as the Labor Department's employment report showed companies cut 524,000 jobs in December. Though the decline was smaller than forecast, the unemployment rate jumped to 7.2 percent from 6.8 percent in November, more than the 7 percent economists predicted.

Perhaps the most anticipated economic report this week will be the Federal Reserve's beige book, its assessment of the economy by region. The report tends to go into detail about the strengths and weakenesses in each part of the country.

Other data this week include the Commerce Department's retail sales report for December on Wednesday, which, coming after individual stores' disappointing reports last Thursday, will show consumers remain very hesitant to spend.

The Labor Department's latest report on weekly jobless claims comes out Thursday. The department delivers its producer price index for December on Thursday and the consumer price index on Friday. However, inflation is not being seen as a problem right now, given the economy's extreme weakness.

Some analysts believe the market may not react that badly to downbeat news this week that last week's news from Alcoa and Intel might have lowered the market's expectations for the companies that will be reporting over the coming few weeks.

"They really set the stage," Heider said. "If it's only bad rather than horrific, I think it could actually have a positive impact on the market."

At the same time, analysts expect investors to be relatively upbeat ahead of the inauguration of President-elect Barack Obama on Jan. 20.

"The excitement around this inauguration is greater than any I've seen in my lifetime," said Randy Frederick, director of trading and derivatives at Charles Schwab. "(Obama's) been very vocal, he's been very clear on his willingness to do whatever is necessary."

Investors are hoping a stimulus package proposed by Obama will soon win congressional approval, but they are anxious for more details of the plan, which includes big tax cuts and has an estimated price tag of nearly $800 billion.

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