The stock market hates uncertainty. Unfortunately, there’s too much for it for Wall Street to bear right now.
The economy is sending mixed signals, with job growth that could be characterized as either decent or mediocre, inflation gauges that show rising prices in some sectors and steady prices elsewhere, and economic growth that could either be healthy or anemic, depending on the metric du jour.
Add to the mix energy prices that, while having fallen last week, are still around $65 per barrel — during a usually low-cost time of year — and corporate profits that are showing hints of a coming slowdown.
Finally, the one hoped-for certainty that investors had clung to earlier this month — that the Federal Reserve would call a halt to its program of regular interest rate hikes — suffered a blow last week when the Fed apparently wouldn’t rule out future rate hikes, depending on the economic and inflation data that comes in.
And, of course, that data is mixed, contradictory and inconclusive.
Investors can generally make money in any kind of environment, so long as they have a good idea of what’s coming, even if it means hardship for the average person. But when uncertainty reigns and investors can’t figure out what to do, sitting on stocks becomes risky — and you get a selloff.
That’s what happened last week, after the Fed’s announcement and disappointing profits from Google Inc. and Amazon.com Inc. For the week, the Dow Jones industrial average lost 1.04 percent, the Standard & Poor’s 500 fell 1.53 percent and the Nasdaq composite index dropped 1.81 percent.
There’s little in the week ahead that promises to provide any clarity. Barring some very positive earnings reports or steep drops in oil prices, the market could be in for more of the same.
Trade deficit figures due Friday
The economic number that has a chance of moving stocks this week is the Commerce Department’s report on the nation’s trade deficit, due Friday. The trade deficit is expected to have risen to $64.5 billion in December from $64.2 billion in November.
Given the high cost of oil this winter, it’s unlikely there’s much room here for a positive surprise. However, as long as the deficit hasn’t worsened considerably, investors could take it as a sign of stronger U.S. exports, which can only help corporate profits down the road.
Eyes on Cisco, Coke, Disney
After Google fell short of analysts’ sky-high expectations and profits at Amazon.com were surprisingly lower during the holiday shopping season, investors are growing increasingly nervous about the tech sector, which had led the early January rally. That makes networking company Cisco Systems Inc.’s earnings report, due after Tuesday’s session, a critical market-mover for the week.
Cisco is expected to earn 24 cents per share for the quarter, up from 22 cents per share a year ago. The company’s stock had a volatile 2005, gyrating between $16.83 and $20.25. Cisco closed Friday at $18.15.
Of the other earnings reports this week, Dow components Coca-Cola Co. and The Walt Disney Co. stand out. Coca-Cola, which reports earnings Tuesday morning, is expected to post quarterly earnings of 45 cents per share, down from 46 cents per share in the fourth-quarter of 2004. Shares of Coke are off 9.6 percent from their 52-week high of $45.26 on May 19 and closed Friday at $40.88.
Interest in Disney shares increased recently after the company agreed last month to buy animation studio Pixar for $7.4 billion. Despite that, however, Disney shares have fallen 16.6 percent from their 52-week high of $29.99 on Feb. 8, 2004, to close Friday at $25.01. The entertainment company, which releases earnings Monday afternoon, is expected to earn 31 cents per share for the quarter, down from 34 cents per share a year ago.
Fed figures speak
The Fed will be in focus again this week as two Federal Reserve Bank presidents speak out on the economy. On Monday, Dallas Fed President Richard Fisher will speak in London, while Chicago Fed President Michael Moskow will address the local economy in a Chicago speech Thursday.
Given the new uncertainty over when the Fed, both speeches will be thoroughly parsed by strategists and could move stocks — though there’s no telling where.