By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- As concerns over an overheated
stock market run high, investor attention this week will shift to
the economy, the next Fed chief, and the outlook from tech
bellwether Cisco Systems Inc.
The week's data releases are likely to be muddied by the
government's October shutdown, making it even harder to figure out
whether the economic recovery is solid enough for the Federal
Reserve to back off its stimulus. Some earnings reports--notably
Cisco (CSCO), Wal-Mart Stores Inc.(WMT), and a few other
retailers--may help fill in the blanks.
Last week, the Dow Jones Industrial Average (DJI) finished up
0.9%, the S&P 500 Index (SPX) gained 0.5%, while the Nasdaq
Composite Index (RIXF) shed less than 0.1%.
Stocks finished higher on the day Friday , including a record
close for the Dow, after a report that the U.S. economy added more
jobs than expected. Economic forecasters, however, are torn about
the reliability of the October jobs report. Atlanta Fed President
Lockhart said on Friday that some data will be less reliable
through the end of the year.
Even so, earlier in the week, San Francisco Fed President John
Williams told reporters that consumer confidence data will be a big
factor going forward in the decision on when to start tapering some
$85 billion a month in asset purchases. On Friday, consumer
sentiment data hit its lowest level since 2011.
In the meantime, some investors are reacting to perceived signs
of a frothy market. Outflows hit U.S. equity funds as stocks traded
near record highs.
"The market's due for a rest and that's what we're seeing," said
Paul Nolte, managing director at Dearborn Partners. Nolte said he
still expects a 3% to 5% pullback from recent highs.
Societe Generale is taking an even gloomier view. It's predicted
a 15% correction for U.S. stocks, citing rising bond yields.
Currently, the Dow industrials and S&P 500 are 0.3% off
their all-time highs, and the Nasdaq is off 1.2% from its latest
13-year high.
Third-quarter productivity and October capacity utilization data
will be of particular interest to Robert Pavlik, chief market
strategist at Banyan Partners.
"Hopefully those numbers show a little growth, if manufacturing
is keeping pace," Pavlik said.
Thursday also brings the Senate confirmation hearing of Janet
Yellen to head the Federal Reserve. Yellen is expected to continue
the dovish Fed policies of current chairman Ben Bernanke. Treasury
yields, which spiked at the end of the week, are particularly
vulnerable to any signs she'll want to curtail the Fed's bond
purchase program as soon as this year.
Most financial markets are open Monday, Veterans Day, though
there are no government data releases.
They start in on Tuesday. include the October small business
index on Tuesday, federal budget on Wednesday, and on Thursday,
September trade deficit and weekly jobless claims reports. On
Friday, investors will receive releases on the November Empire
State index, October import price index and capacity utilization,
along with September wholesale inventories.
Also, investors will be looking for reform signals out of China
as the country's Communist Party holds a four-day meeting, known as
the Third Plenum, to decide the course of the world's
second-largest economy.
Big changes may not be evident for a while, however, according
to David Dollar, senior fellow at Brookings Institute and a former
economic and financial emissary to China. Dollar, at the Asia
Economic Policy Conference held at the San Francisco Fed, said it's
unlikely a bold plan will come out of the plenum and that formal
announcements may not be made for up to two weeks following the
meeting.
Earnings season draws to a close
Dow components will be starting to wrap up earnings season with
Cisco reporting on Wednesday and Wal-Mart reporting on Thursday.
After that the only remaining Dow component left to report this
season will be Home Depot Inc. (HD) on Nov. 19.
Even though he doesn't own the stock, Pavlik thinks Cisco will
be the earnings report to watch this week as a barometer reading
for the tech sector and to see how much money is being spent by
businesses.
"As far as Cisco goes, I'm less optimistic," Pavlik said. "If
IBM fails to deliver on the service side, then I'm interested to
see what happens on the hardware side."
In mid-October, IBM blamed a big revenue shortfall on a drop in
hardware sales to China leading up to the Third Plenum, but some
analysts wondered if weakness in the company's services and systems
business pointed to Big Blue's fading relevance in the eyes of
customers.
Also, a big showing from retailers this week will also throw
some color on the recent low consumer confidence numbers with the
holiday shopping season around the corner. In addition to Wal-Mart,
Macy's Inc. (M) reports on Wednesday, and both Nordstrom Inc.(JWN)
and Kohl's Corp.(KSS) report on Thursday.
Other S&P 500 companies reporting include News Corp (NWS)
(NWSA) on Monday, D.R. Horton Inc. (DHI) on Tuesday, along with
Tyco International Ltd.(TYC) and Viacom Inc. (VIA) (VIA) on
Thursday.
Earnings season has been regarded as mixed. While companies are
reporting record earnings, they're also topping low-balled earnings
estimates that can be massaged through accounting practices.
They're also having a tougher time beating revenue estimates.
Of the nearly nine-tenths of the S&P 500 that has already
reported earnings this season, about 73% have topped the earnings
consensus, equal to the four-year average, while only 52% have
beaten the revenue consensus, well below the four-year average of
59%, according to John Butters, senior earnings analyst for
FactSet.
Forecasts for the current quarter are also depressed. About 86%
of companies (73 out of 85) that provided an earnings guidance gave
one that fell below the Wall Street consensus at the time,
according to Butters. Over the past five-years, the average
negative earnings guidance rates stands at 63% of companies with
outlooks.
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