IE 11 is not supported. For an optimal experience visit our site on another browser.

Wall Street warily waits for banks’ earnings

Investors knew the first three months of the year were bad for companies, but now it looks like they were downright abysmal.
/ Source: The Associated Press

Investors knew the first three months of the year were bad for companies, but now it looks like they were downright abysmal — and that there might be more pain to come. With the nation’s banks releasing their quarterly results this week, anxiety has returned to the stock market.

Last week ended on a grim note, with the Dow Jones industrials falling 256 points Friday after General Electric Co. reported a profit decline and lowered its forecast for the year. The disappointing data from GE arrived on the heels of downbeat earnings and outlooks from companies ranging from chip maker Advanced Micro Devices Inc. to home furnishings retailer Bed Bath & Beyond Inc.

“The biggest risk to the market is earnings,” said David Chalupnik, head of equities at First American Funds, adding that profit forecasts for 2008 appear too optimistic at this point. “We do expect April to be a volatile month — we expect earnings and guidance to be poor.”

The Dow finished last week down 2.25 percent, the Standard & Poor’s 500 index ended 2.74 percent lower, and the Nasdaq composite index slid 3.41 percent.

This week, the banks open their books. Roiled by a mortgage industry that went haywire when homeowners started defaulting on their loans, the nation’s financial centers are struggling. When banks struggle, they get tight with their lending — which in turn dampens the economy.

Citicorp Inc., the nation’s largest bank by assets, and Merrill Lynch & Co., the world’s biggest brokerage, are each believed to have suffered losses in the first quarter, although narrower than those they reported in the fourth quarter. Washington Mutual Inc., the nation’s largest savings and loan, is also anticipated to post a loss.

Analysts predict JPMorgan Chase & Co. and Wells Fargo & Co. will report profits, but below the level seen a year ago. Meanwhile, investors will scrutinize first-quarter results from Bear Stearns Cos. to see how wise it was for JPMorgan to buy the struggling firm.

Beyond the actual earnings from these institutions, however, investors will examine how much the banks’ assets lost value in the first three months of the year and seek clues about whether those values could fall further.

“The good news is, the credit markets do look to be improving a bit,” Chalupnik said, pointing to the shrinking spread between the rates for high-risk and low-risk debt. “But I think it will still be rough going for the financial sector.”

The torpid economy is making the consumer lending industry a tough one to navigate. Economic reports will probably take a back seat to earnings this week, but any hint that consumers are spending even less than individual retailers’ dismal March sales figures implied last week could influence investors in the long term.

On Monday, the Commerce Department reports on March retail sales. According to the median estimate of economists surveyed Friday by Thomson Financial/IFR, the market forecasts a flat reading, following a drop in February.

“If it’s flat, that means that real spending has declined,” said Bill Hampel, chief economist for the Credit Union National Association and Affiliates. For retail sales to actually increase, growth needs to be at least about 0.3 percent, he pointed out. “The last four months, we’ve essentially had no growth in retail sales when adjusted for inflation.”

Some analysts say the market is at or near its bottom, having already taken into account a recession. A severe recession could mean sluggishness in the stock market for several months, if not longer.

“This is a consumer-led recession,” Hampel said, noting that households are paring back spending because their debt is unmanageable, and that drop in spending is dragging down the economy. “How long they do this is how long the recession ends up being.”

The soaring cost of necessities, like food and gasoline, is also dampening spending.

The Commerce Department reports this week on producer prices and consumer prices in March. Both are expected to increase, but fairly modestly — and furthermore, the Fed’s main concern right now is economic growth.

“Although the Fed cannot say this, I think for the most part, as a group, it doesn’t matter to them what happens to inflation this week,” Hampel said.