U.S. Federal Reserve Chairman Alan Greenspan travels to Capitol Hill this week to deliver his semi-annual testimony on monetary policy, and Wall Street will be listening closely. After last Friday’s lukewarm jobs report, some in the markets are asking if the current economic recovery can maintain its momentum.
In a week of limited economic news and with the flow of fourth-quarter earnings reports slowing to a trickle, the Fed chairman’s congressional testimony will take center stage. Greenspan appears Wednesday morning before the House Financial Services Committee, and then on Thursday morning he will speak before the Senate Banking Committee.
“Greenspan’s appearance on Capitol Hill will be the most significant economic event of the week,” said Peter Cardillo, chief strategist at New York brokerage S.W. Bach.
“The market is likely to scrutinize every word he says, but I think Greenspan will reiterate that there’s no looming reason to raise rates. The only thing can alter that view is a sharp decline in the U.S. dollar,” Cardillo added.
The Fed chief’s appearance comes over a week after the Federal Reserve caught nearly everyone on Wall Street by surprise by opting to back away from a promise to keep interest rates low “for a considerable period.”
The decision, which came at the Fed’s mid-January policy meeting, led to a triple-digit drop for the Dow Jones industrial average, as many traders took the change in language to mean that an interest hike is likely in the not too distant future.
Investors seek economic clarity
With earnings season winding down, investors have refocused on the economy, looking for a fresh catalyst to drive the market higher after a stock-buying binge over the last 11 months. Stocks have struggled to move higher over the last few weeks, as investors have cashed in gains from a rally that started last March.
Last Friday’s January employment report pushed stock prices sharply higher, although the data were less than inspiring.
Most were hoping to hear that the U.S. economy's unsteady recovery is finally starting to see solid employment growth, but in the end the data were middling, with the economy adding 112,000 new jobs in January, below Wall Street's estimate of 150,000.
“It was one of those lackluster numbers we’ve been seeing lately,” said Peter Dunay, chief market strategist at New York brokerage Wall Street Access.
“Data have been missing estimates, but they are still strong. If we continue in this trend we’ll need to pare back growth forecasts and ultimately corporate profit growth, and that means we are not going to see the strong economic growth we’ve been expecting,” he added.
While slower-than-expected growth could be a problem for stocks long-term, particularly when interest rates begin to rise, in the short term Dunay expects stocks to continue to move up, albeit at a more modest pace.
“I think we’ll stabilize here and move higher,” Dunay said. “Everyone has been looking for a correction, so I think the market is likely to do the opposite and move higher. But the gains will be slow over the next few months, with some backing and filling. So instead of seeing 200-point rallies we’ll see the Dow up 30 points for the week.”
Earning reports still in focus
This week, investors will also focus on those companies reporting earnings for the fourth quarter. The list includes companies like Dow 30 components Walt Disney and Coca-Cola, and also high-tech bellwether Dell Computer.
As of Friday, about 80 percent of the companies in the Standard & Poor’s 500-stock index had issued quarterly results, reporting year-over-year earnings growth of about 22 percent. Results have beat Wall Street’s average estimates by about 5 percent, above the historical rate. But although profit growth has been strong, Wall Street has become increasingly unreceptive to the good news.
A factor weighing on the market is technology bellwether Cisco Systems, which spooked investors last week by issuing a cautious outlook about corporate spending in its quarterly earnings report. The news pushed technology stocks on the Nasdaq Composite index down sharply mid-week.
“Cisco probably did the worst thing they could do, in terms of denting investor confidence for a pickup in capital spending,” said Ozan Akcin, chief market strategist at Puglisi & Co. in New York. “The market’s very sensitive as a result.”
Aside from earnings, analysts said stocks could also take a cue from economic data released this week, including weekly claims for jobless benefits, and reports on business inventories for December, consumer sentiment data and retail sales for January.
The retail sales report will be key, analysts said, as Wall Street will monitor it closely for signs about the health of consumer spending, which accounts for about two-thirds of U.S. economic activity.
Stocks rallied Friday on the heels of a tepid January jobs report. For the week, both the Dow and the S&P 500 index saw modest gains, but the tech-rich Nasdaq Composite fell for a third straight week.
Reuters contributed to this story