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Fed decision on rates unlikely to spur rally

Wall Street  is divided on whether the Fed will raise interest rates at its meeting Tuesday —conventional wisdom says a rate hike. Either way, the decision probably won’t have big impact on stock prices in the week ahead.
/ Source: The Associated Press

Wall Street opinion is split on whether the Federal Reserve will raise interest rates at its meeting Tuesday, with conventional wisdom siding with a rate hike. But either way, the decision probably won’t have as much impact on what happens to stock prices in the week ahead as will news of corporate earnings surprises.

Contrarians argue that last week’s reading of the consumer price index showed that inflation, which higher interest rates help to combat, is not a threat to the economy. And with job growth sluggish, keeping short-term rates steady could encourage businesses to invest in growth and hire new workers.

However, by not raising rates, some investors fear the Fed would be sending a negative message about the nation’s economic prospects. And while economic growth has slowed in recent months, it hasn’t reversed course entirely.

With the benchmark lending rate at 1.5 percent, rates are still historically quite low — past economic recoveries have seen rates at 3 percent or higher at this stage. Thus, the Fed can raise rates without substantially harming companies’ ability to borrow, analysts said.

Previous results uninspiring
Unless the Fed does something really surprising, the interest rate decision isn’t likely to be a market mover this week, and investors will have to look elsewhere for guidance, most likely at individual company pre-announcements, on how stocks will perform in the near-term. And so far, the results have been mostly disappointing.

The Coca-Cola Co., a Dow component, precipitated last Wednesday’s sell-off with its negative outlook, and Intel Corp.’s mid-quarter update did the same the previous week. While Ford Motor Co.’s bullish outlook on Friday was a positive for the markets, most pre-announcements usually carry warnings rather than good news, a product of the Securities and Exchange Commission’s pressure on companies to get news to the public as soon as possible.

Last week, muddled news on the economic front and Coke’s outlook kept the major indexes mixed. The Dow fell 0.3 percent, reversing five weeks of gains, while the S&P 500 was up 0.4 percent and the Nasdaq rose 0.8 percent. The S&P 500 remained in positive territory for the sixth straight week, while the Nasdaq, up two weeks in a row, broke the 1,900 mark on Monday for the first time since July 20.

What to watch this week:
Economic data: Stocks of homebuilders and other construction firms could see movement this week thanks to new data on building and home sales. On Tuesday, the Commerce Department will release reports on new home construction and building permits for the month of August, and economists expect both categories to fall from July.

On Friday, the National Association of Realtors will release an August report on existing home sales, which are likewise expected to drop slightly from the previous month.

For the industrial sector, the latest Commerce Department report on orders for durable goods in August, due Friday, should give investors an idea of the strength of consumer demand. Economists are expecting an 0.5 percent increase in orders for goods meant to last more than three years — appliances, electronics, and the like — less than the 1.6 percent rise posted in July.

Earnings: While the bulk of third quarter earnings won’t be out until mid-October, the financial sector will be in the spotlight this week, with four major brokerages due to release their earnings for the quarter ended Aug. 31. The investment banking and services sector has declined so far this year, with the Dow Jones Investment Services Microsector index falling 3.54 percent year-to-date.

Lehman Brothers Holdings Inc. will announce earnings on Monday before the session. Wall Street is expecting quarterly profits of $1.55 per share, lower than the $1.81 per share posted a year ago.

Before Tuesday’s opening, Goldman Sachs Group Inc. will release its earnings. Wall Street forecasts call for $1.46 per share for the quarter, up from $1.32 per share a year ago. Bear Stearns Cos. Inc. will post earnings on Wednesday before the bell. Analysts expect $1.97 per share from Bear Stearns, down from $2.30 per share a year ago.

Finally, on Thursday, A.G. Edwards Inc. will report earnings before the session. Wall Street has forecast a profit of 56 cents per share, up from 46 cents a year ago.

In other earnings, FedEx Corp. is scheduled to release earnings on Wednesday and is expected to post profits of $1.07 per share for its first quarter of fiscal 2005, a strong improvement from the 61 cents per share a year ago. FedEx has substantially outperformed the market this year, rising 30 percent since the start of the year and setting a new 52-week high on Friday, closing at $88.11, up $1.11. By way of comparison, rival shipper United Parcel Service Inc. is up only 1.7 percent for the year.

In the technology sector, battered with negative outlooks and disappointing revenues of late, software firms Adobe Systems Inc., Red Hat Inc. and palmOne Inc. are all expected to release their quarterly earnings on Monday after the session. All three are expected to improve from a year ago.

Events: Naturally, the Fed’s Open Market Committee meeting on Tuesday will command investors’ attention, with the decision on interest rates — and the accompanying statement which will be thoroughly parsed by analysts — expected at about 2:15 p.m. ET.