Stock rally buzzkill: No rate cut in April?
Posted
Apr 21 2008, 04:25 AM
by
Jon Markman
Last week’s stunning 5% advance in the stock market is likely to have one consequence that credit-starved sensitive businesses won’t like: It has eroded the likelihood of further cuts in interest rates by the Federal Reserve when its Open Market Committee meets next week.
Despite a rise in joblessness, decline in housing activity and spate of bankruptcies, the futures markets and even dovish Fed governors are now expecting the central bank to stand pat for the first time in six months.
This is something of a shocker when you consider that the odds of a cut of a half percentage point were extremely high just two weeks ago. Now traders who bet on the likelihood of cuts don’t even consider it likely that the Fed will cut by a quarter of a percentage point. If the economy really is on solid ground now, just because stocks are up, it sure will be a surprise to businesses who are seeing more dramatic sales and profit declines than they can recall in years. We’ll learn more on Tuesday and Thursday mornings when existing and new-home sales data is released, and on Thursday afternoon when continuing jobless claims for April are released, but already the news from corporate America is grim.
The hits just keep on coming and now comes the second “peak week” of the first-quarter earnings season, with nine members of the Dow Jones Industrials Average set to announce results in the next five days, along with 155 companies in the S&P 500 Index. So far, the results are dismal -- and the only reason the market hasn't cratered is that pessimistic investors actually expected worse. According to Thomson Financial, earnings have already contracted in the first quarter by 14.8% on average, which is a far cry from the 5.8% growth expected on Jan. 1, or even the 11% contraction expected on April 1.
Most of the shortfall seen this month is attributable to horrific results from a handful of large companies like Wachovia and Pfizer. Just to give you the scope of the bad news in dollar terms, diversified banks have reported a loss of $13.6 billion, insurers lose $5.3 billion, investment banks and brokerages lost $4.9 billion.
Energy companies are virtually the lone shining light this quarter, recording a 28% first-quarter income gain so far as a group. Worst are financials, with a 67% loss in income and retailers, with a 15% setback. If you’re looking for earnings growth outside financials, Thomson Financial data suggests that key groups to look at are movies and entertainment, expected to see earnings rise 13%; broadcasting and cable, +10%; and restaurants, +12%. I guess it's just a Mickey Mouse and Happy Meal kind of a market, as Disney and McDonald's are among the highlights.
If you're feeling frisky, my own top prospects for potentially strong earnings plays this week include electronics conglomerate Ametek, steelmaker AK Steel and energy services provider Baker Hughes.
