Wall Street’s in the dark about a lot of things — how much risky debt banks are holding, how the Federal Reserve plans to keep the markets running smoothly, and whether the strong parts of the economy will stay strong.
And like anyone in the dark, investors are having a difficult time finding their bearings. This week could mean more floundering unless they get some clearer signals about the economy’s resilience and from banks and brokerages about the risks they face after investing in mortgages that later went sour.
The Dow Jones industrial average finished last week down 1.53 percent, after the erratic, triple-digit swings the blue-chip index logged over those five days. The Standard & Poor’s ended down 1.67 percent, while the technology-dominated Nasdaq composite index finished up 0.22 percent.
The Federal Reserve last Wednesday lowered key interest rates by a quarter point, as expected. But it said the strained financial markets have eased a bit since the summer’s credit crisis and that “the upside risks to inflation roughly balance the downside risks to growth” — suggesting to Wall Street that the Fed may not keep lowering rates to spur business activity.
That’s a scary thought for some investors who believe the economy’s health is in jeopardy due to widespread credit problems. Last week’s government data gave investors a very fuzzy picture of the economy: October job growth was much stronger than expected, but September personal spending and October manufacturing growth slowed.
The parts of the economy in question, as they have been for the greater part of the year, are the housing and financial sectors. U.S. earnings, overall, are poised to post their first decline in five years, thanks to poor results at companies who made bad bets when lending and investing. Meanwhile, industries like technology have stayed robust.
“It’s been an interesting tale of two markets,” said Linda Duessel, market strategist at Federated Investors in Pittsburgh. “The economy still looks good except for these two areas, which are deep, deep, deep in the woods.”
So far, there’s not enough evidence to say the economy isn’t surviving the recent crisis facing banks and other lenders. “The market just hates the news they don’t know yet,” Duessel said.
There are still a few more quarterly earnings reports yet to come in. Companies with earnings releases scheduled for this week include automakers General Motors Corp. and Ford Motor Co.; technology companies Cisco Systems Inc., Sun Microsystems Inc. and Qualcomm Inc.; and insurers American International Group and Marsh & McLennan Cos.
And though the economic data schedule is thin this week, there are a few reports that investors will be monitoring. The Institute for Supply Management releases its October index on Monday, and economists are anticipating, on average, slightly weaker growth than in September. Meanwhile, the University of Michigan is expected to show a dip in consumer sentiment in November compared to October.
But even if these reports turn out to be upbeat, they’re not likely to give the market much of a boost to the upside. The Fed seems satisified with how the economy is doing, so a good set of numbers won’t change its sentiment. Wall Street is likely to get more direction from inflation figures — the Labor Department’s producer and consumer price indexes — which aren’t scheduled to be released until next week.
And any unexpected good news about the economy is also unlikely to have an impact. So Wall Street will have to wait a while before it can emerge from this latest morass.