NEW YORK – The stock market is expected to spike and dive next week with the fortunes of war as the minute-by-minute progress of the U.S.-led assault on Iraq dominates Wall Street.
"Next week will be a repeat of this week: uncertainty and volatility," said Stanley Nabi, managing director at Credit Suisse Asset Management, which oversees about $55 billion in North America. "There is no closure in Iraq. Therefore, it will remain a factor."
Wall Street slumped this week after two straight weeks of startling gains fueled by hopes for a swift and decisive U.S.-led victory in Iraq. Investors are scaling back those expectations as Iraqi troops put up stiff resistance and the number of casualties mounts on both sides of the conflict.
"I don't think anybody would want to guess on the direction of the market next week, because it just depends on the war," said Brian Pears, head of equity trading at Victory Capital Management. "I expect volatility going forward. We are trading on mood swings right now more than than information."
Rapid-fire headlines and grainy television footage out of Iraq are stealing the spotlight on Wall Street. But nagging worries over corporate earnings and the nation's lackluster economy are also keeping investors on edge.
The confessional period, when companies warn quarterly earnings may miss analysts' expectations, heats up next week and could put a damper on investor sentiment as the war crimps corporate profits.
A handful of economic reports offering snapshots of the job market as well as the nation's manufacturing and services sectors may also prove a disappointment.
"Expectations for economic activity that will be released next week are for a continuation in the soft patch," said John Davidson, president and chief executive officer at PartnerRe Asset Management, which oversees more than $5 billion.
What a difference a week makes.
At Friday's close, the blue-chip Dow Jones industrial average was down 4.41 percent for the week, while the tech-laden Nasdaq composite index and the broad Standard & Poor's 500 index each shed 3.6 percent.
That was a big swing down after the previous week's explosive rally, when the Dow average finished trading on Friday, March 21, up 8.36 percent -- its best weekly gain in more than 20 years. That rally was driven by investors' hope for a swift end to the Iraq war in a firestorm of missiles and bombs raining on Baghdad.
This past week, Wall Street got a reality check.
The Street's initial euphoria over the start of the war faded, and questions surfaced about the duration of the fighting. A Washington Post article Thursday quoted military officers saying the war is likely to last for months.
"Everybody expected this war to last between three and five days, and it's going to last much longer than that," Nabi said.
Market watchers caution next week may be volatile for stocks as the hundreds of journalists embedded with the U.S.-led forces file a stream of reports and the United States and Iraq each offer their own spin on the war's progress.
"The fortunes of war can change or appear to change on an hour-by-hour basis so that what may in one hour appear to be a tremendous success, in the next hour can be countered with negative news," Davidson said.
The confessional period will become more intense in the week ahead, with the quarterly earnings season set to kick into high gear in mid-April. The outlooks so far are trending negative.
"Where we are in the season, it's heavy on the negative pre-announcements," said Joe Kalinowski, chief investment officer at Ehrenkrantz King Nussbaum. "What's disturbing is that for every one positive change, there's been three negative ones. It's a ratio of three negative to one positive, which is very high."
Earnings will trickle in, with Alcoa Inc. (AA), the world's biggest aluminum maker, Friday becoming the first Dow member to report quarterly results. Natural gas services company El Paso Corp. (EP), household products retailer Bed Bath & Beyond Inc. (BBBY) and electronics retailers Best Buy Co. Inc. (BBY) and Circuit City Stores (CC) also will post results next week.
Earnings for Standard & Poor's 500 companies are expected to grow 8.3 percent in the first quarter, compared with the same period last year -- down from expectations at the beginning of the year for 11.7 percent growth, according to research firm Thomson First Call.
"Wall Street might be in for somewhat of a negative surprise," Nabi said. "The first quarter has developed to be much weaker than Wall Street expected."
The week's key economic data will include the U.S. Institute of Supply Management's manufacturing index on Tuesday. Economists expect a drop to 48.6 in March from 50.5 in February, breaking below the 50 mark to flag contraction. ISM's reading on the services sector Thursday is expected to dip to 52.3 from 53.9.
Friday, the government will release its March employment report. Payrolls are seen losing 29,000 nonfarm jobs in March, after a plunge of 308,000 in February, when the economy suffered its worst jobs drop since the aftermath of the Sept. 11 attacks.
The unemployment rate is expected to tick up to 5.9 percent in March after landing at 5.8 percent in February. Harsh winter weather and the call-up of military reservists to the Gulf may have played into some of the weakness in February.
"Although the economic activity in the first week of the month will give hints on the month of March and are often market-moving releases, I think next week the market will continue to focus primarily on the events in Iraq," Davidson said. "That's what will move the markets."