NEW YORK – U.S. stocks are expected to rise next week as Wall Street paws through a cupboard of mixed economic data and seizes on the ingredients for a sustainable rebound next year.
Falling oil prices, another interest-rate cut expected on Tuesday, likely tax cuts and the Treasury's decision to stop selling 30-year bonds are the recipe to support stocks, at least in the short term, traders and money managers say.
Even a stunningly bad unemployment report on Friday couldn't deflate optimism, and blue-chips closed the session higher.
"The action of the tape on Friday bodes extremely well for next week," said Kevin Connellan, head of equity trading for Northern Trust Co., which manages $390 billion. "It implies optimism that 2002 will be better than anticipated, despite the fact that the fourth quarter will be horrible."
Wall Street pros warn, however, that more major terror attacks on the United States could rattle consumer confidence. And they say fears about higher unemployment, the slumping economy and dismal corporate profits make it likely the bounce will not extend much past next week.
"We'll surely get another interest-rate cut and the fact that oil is below $20 a barrel is positive, but it's not enough to get euphoric about," said Cummins Catherwood, who oversees $800 million for Rutherford Brown & Catherwood. "I can't believe the rally is going to continue."
Closely watched corporate quarterly profit reports from market leaders, such as Cisco Systems Inc., and data on consumer confidence and producer prices will keep investors on their toes in coming days. If they bring bad news, stocks could quickly cool.
Major market indexes closed the week slightly lower than their levels last Friday as stocks priced in dour profit results and Wall Street fretted over signs consumer confidence has fallen. Even so, the broader market pared earlier declines in half after a report on gross domestic product showed the economy slid less than forecast,
For the week, the Standard & Poor's 500 index slipped 1.6 percent, the Nasdaq composite index declined 1.3 percent and the blue-chip Dow Jones industrial average lost 2.3 percent.
Stock Market Supports
Oil slid to a two-year low on fears of wilting demand. While a drop in energy prices hurts oil companies, it is a boon for consumers and businesses. On Friday, NYMEX crude futures fell as low as $19.69, the weakest level since July 1999.
Wall Street is also betting the U.S. Federal Reserve's rate cuts — nine so far — will soon underpin economic growth, as lower rates make it cheaper for businesses and consumers to borrow money. Economists polled by Reuters expect the Fed to cut rates another half point after falling GDP and rising unemployment showed the devastating impact of the Sept. 11 terror attacks.
Another positive for stocks is expected government tax cuts. The cuts may bring relief for consumers and businesses reeling from the Sept. 11 attacks and subsequent anthrax scares and deaths around the nation.
And finally, Wall Street pros jumped for joy after the U.S. Treasury surprised the market with an announcement it would no longer sell the 30-year bond.
"It's going to open the gates to substantial refinancing of corporate America," said John O'Donoghue, co-head of listed trading at Credit Suisse First Boston. "It cuts down on their debt service and that means they're going to have more money to pump into research and development" and other spending programs.
These combined factors provide support for a sagging economy, money managers said. That has allowed the market to look past dismal unemployment figures and other worries.
On Friday, the Labor Department said 415,000 jobs were shed in October and the unemployment rate soared to 5.4 percent — the highest level in almost five years. Even so, the blue chips and the S&P 500 climbed.
"Every time we get a piece of news that is very bad, the market is so resilient that it just absorbs it and moves on," said Stanley Nabi, a managing director at Credit Suisse Asset Management, which oversees $100 billion. "We know the economy is weak, we know the economy is in a recession, we know earnings are poor. All of these things have been discounted."
Still, worries linger. Traders say they doubt stocks can hold gains much past next week, pointing to slumping corporate profits and saying no rally can sustain itself without solid corporate fundamentals.
Indeed, analysts surveyed by Thomson Financial/First Call expect S&P 500 companies to report fourth-quarter profits that fell about 15 percent from the same period a year ago. And the same analysts don't expect earnings to pick up again until at least the second quarter of next year.
"There's a real disconnect here between the dismal nature of the economic data and the performance of the equity market," said Phil Orlando, chief investment officer of Value Line Asset Management, which oversees $6 billion. "At some point, the equity-market chickens have to come home to roost."