Market relies on corporate confidence
By Hope Yen
Associated Press
NEW YORK — With the war winding down, Wall Street stumbled lower this week as investors shifted their attention to first-quarter earnings reports.
Many believed change bodes poorly for stocks because of concerns that the war curtailed spending by consumers and businesses, and therefore eroded company profits. But analysts say the more crucial factor will be the outlook statements issued with profit reports, because those assessments will reveal how confident companies are about growth and capital spending needed to revitalize the economy later this year.
"Who cares about the first quarter? First, the numbers are distorted because of the war and, second, they're history," said Chuck Hill, director of research at Thomson First Call. "We should always pay more attention to comments accompanying the reports."
Hill explained that the profit outlooks will be key since many analysts have forecast stronger growth in the second half of the year. Cautionary statements contradicting that view, he said, could dash hopes for a market rally.
"We're at a crucial time here in this recovery," Hill said, noting that twice in the past year, tepid corporate outlooks led economists to push back their forecasts of a stronger rebound.
"The question is: Are companies going to slash numbers again and push back, or will the wolf really appear this time in the form of a big pickup in earnings later this year?"
There was evidence this week of the market's concerns about forecasts for the future.
The Dow industrials lost ground during the week primarily on a 100-point slide Wednesday that came despite news that the regime in Iraq had toppled. And on Monday, a 243-point rally fizzled even while Dow component Alcoa posted stronger-than-expected earnings.
It was a striking contrast to the war's beginnings more than three weeks ago, when stocks surged 200 points or more on bets of a quick victory. The losses seemed to counter conventional wisdom that the war's uncertainty was the main hindrance to a surge.
Analysts said Wall Street's reaction was not entirely surprising. They noted that since March 11, while anticipating the start of the war and the subsequent rally, investors had pushed stocks sharply higher. Indeed, up till this week, the Dow had gained 753 points, or about 10 percent.
"The market tends to be a forward-looking pricing mechanism. So the market started celebrating early and predicting the end," said Arthur Hogan, chief market analyst at Jefferies & Co. "Unfortunately, we're going from one roller coaster to another. We had an emotional roller coaster with news from Iraq. Now we have a roller coaster with each company warning or guiding."
Hill said companies' capital spending plans also will be critical, since many economists believed companies were unwilling to invest amid the war uncertainty. McDonald's this week became one of the first companies to say it would sharply cut spending devoted to increasing sales.
"Companies aren't going to turn on the capital spending spigot until we sop up some of that excess capacity," he said. "We've got too many burger joints ... too many automobile assembly plants, too many teenage apparel stores and on down the list."
In the meantime, analysts say, investors should expect more choppy trading as the market sorts out the corporate outlooks released in the coming weeks.
Wall Street's major indexes ended the week lower. For the week, the Dow fell 73.74, or 0.9 percent. It closed yesterday at 8,203.41.
The Nasdaq composite index had a weekly loss of 24.66, or 1.8 percent, closing at 1,358.85 yesterday.
For the week, the Standard & Poor's 500 index dropped 10.55, or 1.2 percent, to finish at 868.30.
The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 8,227.54, down 92.46 from the previous week. A year ago, the index was at 10,437.84.
