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Wall Street awaits answer to recession question

This week’s flood of readings on inflation, retail sales and earnings is just what a data-hungry Wall Street has been anxious for.
/ Source: The Associated Press

This week’s flood of readings on inflation, retail sales and earnings is just what a data-hungry Wall Street has been anxious for.

But it could be a case of the old saying, be careful what you ask for, because you might actually get it. Evidence that consumers and companies are cash-strapped could mean the economy is on a fast track toward recession — or already in the midst of one.

“I think we’re going to look back on fourth-quarter earnings and instead of thinking the recession is coming, if there is one, it already started,” said JPMorgan equities analyst Thomas J. Lee.

Stocks floundered last week, bouncing higher and lower as investors grasped for direction ahead of the upcoming earnings deluge. Last week brought a pledge from Federal Reserve Chairman Ben Bernanke that he was prepared to lower interest rates if needed, and news that Bank of America Corp. was buying the embattled mortgage lender Countrywide Financial Corp.

But the two pieces of encouraging news gave stocks only a temporary lift, as upcoming economic data and earnings releases hung over investors’ heads.

The Dow Jones industrial average was down 1.51 percent for the week, the Standard & Poor’s 500 index was down 0.75 percent, and the Nasdaq composite index was down 2.58 percent.

This week, investors will pore over fourth-quarter results from a stream of banks — Citigroup Inc., JPMorgan Chase & Co., Merrill Lynch, Wells Fargo & Co. and Washington Mutual Inc., to name a few — and other big names such as Intel Corp., International Business Machines and General Electric Co.

The fourth-quarter numbers, already expected to be disappointing, will be less important than the outlooks the companies give, as investors try to gauge when earnings will rebound. The financial sector will be under particular scrutiny, being the industry that dragged down the rest of the market in 2007, as will technology, which was the Wall Street darling last year.

Meanwhile, the government will release its monthly readings on retail sales, producer prices, consumer prices and home construction; the Federal Reserve comes out with its Beige Book on economic conditions in various parts of the country; and Fed officials will deliver speeches ahead of their Jan. 29-30 meeting on interest rates.

The market believes the week’s data, in sum, will point to a weakening economy but also moderating inflation — a formula for more rate cuts, which may not save the country from recession altogether but could help it bounce back more quickly.

Economists surveyed by Thomson Financial last Friday anticipate that the Commerce Department will report Tuesday that December retail sales were close to flat with November, given last week’s wretched readings from individual retailers.

The economists also predict the Commerce Department will report Thursday that housing starts and building permits fell in December from the prior month.

The market sees the Labor Department’s readings on producer prices and consumer prices rising by a smaller amount in December than they did in November. Higher-than-expected readings could reignite jitters that the Fed, though likely to reduce rates at the end of the month, may choose to limit its rate-lowering campaign.

With the state of the economy in question, Wall Street is likely to remain on edge throughout the next few weeks of earnings. It’s possible, though, that the stock market — sometimes seen as a bellwether for the economy and not the other way around — may have already completed the bulk of its selloff.

Lee pointed out that a survey this week by the American Association of Individual Investors showed that bearish investors outnumbered bullish investors by nearly 30 percent. Over the past 1,100 weeks (about 21 years) a reading above 26 percent has happened 15 times, he said — and each time, the S&P 500 was up in six months and in a year.

The Dow, the S&P and the Nasdaq all tumbled during the fourth quarter, and are down several percentage points so far for 2008.