NEW YORK (CNN/Money) -
So far 2003 has been sweet for investors.
Leaving December's funk behind, stocks have powered forward to one of their best annual starts on record. With enthusiasm mounting that this is the year the economy gets back on track, investors have met good news, like the bigger-than-expected Bush economic plan, with glee, and have looked past bad news, like Friday's soft jobs report.
The rosy optimism can't last forever, right? There is still Iraq, after all, and North Korea, as well as higher energy prices, a mounting budget deficit, tapped-out consumers and a lingering risk aversion among companies that is stifling growth.
|Special: Investing in 2003
Maybe 2003 really is the year that everything gets better, but at some point, the old worries have got to encroach on investor giddiness. (For a look at key events in the week ahead, click here.)
But maybe not right away.
"Given the lift off -- which I totally missed -- it's going to be tough to break the markets down," said Raymond James chief investment strategist Jeff Saut, who thinks stocks should hang in well until Jan. 28, when President Bush's State of the Union address may revive geopolitical jitters.
In the coming week the fourth-quarter reporting season is going to kick off in earnest, and if past is any sort of prologue, that should be good for the market. The reason: Companies that aren't able to meet profit expectations typically issue earnings warnings ahead of time.
|Quarter ||Negative preannouncments ||Positive preannouncements |
|Fourth quarter 2001 ||45% ||26% |
|Third quarter 2002 ||53% ||23% |
|Fourth quarter 2002 ||43% ||27% |
| * Through Jan. 10; other quarters are for comparable period.|
| Source: First Call|
(To not issue a warning has come to be seen as a sign that management doesn't have a handle on things -- witness what investors just did to Alcoa's stock.) So by the time earnings season rolls around, the tendency is for companies to report results that meet or beat expectations.
This time around could be particularly swell. According to earnings tracker First Call, the ratio of companies that have said results will be worse than expected to companies that have said results will be better is 1.6. For the third quarter, that ratio was 2.5 and for the fourth quarter of 2001 it was 1.7. The implication is that fourth-quarter earnings growth for companies in the S&P 500 could be significantly better than the currently expected 10.8 percent.
"We think when all is said and done, you're talking about something like 13 percent growth," said First Call research manager Joe Cooper. (For a look at seven earnings reports next week that matter most, click here.)
Saut thinks that there's something more than just investor enthusiasm and expectations of market-pleasing earnings that's set stocks rallying.
He points out that many of the hedge funds that were with us at the beginning of 2002 were shut down by the time the year came to a close. He suspects these were forced closures -- clients pulling their money away from managers who had bet poorly. The way hedge fund rules work, investors have only one opportunity a year to exit the funds. They notify the fund by the end of November, and the fund is required to give them back their money (or what's left of their money) by year end.
So maybe the reason that the Santa Claus rally that people were looking for at the end of December didn't come this year was that too many funds were selling their positions.
"Once they got done liquidating, the selling ended," said Saut. The result was a "throwback rally" which was abetted by a raft of new pension money and the conventional wisdom that markets never go down four years in a row.
Not just the raft of feel-good earnings reports, but some kind news on the economic front could also help stocks along in the week to come. The big reports are retail sales on Tuesday and industrial production on Friday, but there will also be the producer price index, the consumer price index, the Philly Fed report and the Michigan sentiment report to keep things lively.
"The retail sales and industrial production numbers could be better than people expect," said Bank One chief economist Diane Swonk.
Retail sales should be helped along by continued strength in automobile sales, where generous incentives continue to draw buyers into the showrooms. And the holiday season may not have been as bad as the dismal December chain store sales suggested. Productivity gains, and the implications of the surprising strength in the Institute for Supply Management's purchasing managers' index (even if some of it was overstated) suggest that industrial production could come in well.
Key events in the week ahead
- There's a slew of company results coming up in the coming week. Click here to see the ones that matter most.
- December retail sales come out Tuesday. Thanks in large part to generous incentives from the auto companies, economists surveyed by Briefing.com expect sales grew by 0.6 percent, compared with 0.4 percent growth in November. Excluding autos, they expect sales grew by 0.4 percent versus November's 0.5 percent.
- The producer price index, which tracks inflation at the wholesale level, comes out Wednesday. After unexpectedly dipping 0.4 percent in November, economists think it rose 0.2 percent in December. That's still low and somewhat surprising given the gains in many commodity prices.
- The Department of Commerce releases its November report on business inventories Wednesday. Usually this doesn't garner much interest -- economists already know much of what's in it -- but if it differs significantly from expectations it can have implications for gross domestic product estimates. Economists forecast inventories grew by 0.2 percent in November compared with growth of 0.2 percent in October.
- The Federal Reserve puts out its Beige Book -- a collection of anecdotal reports on the economy collected by regional Fed banks -- on Wednesday. At times the Beige Book can move markets and it is almost always worth reading if you want a good snapshot of what the economy looks like.
- The key read on inflation, the consumer price index, is due out Thursday. Here, too, there has been little movement -- prompting many commentators to worry over the threat of deflation. Economists expect the CPI grew by 0.2 percent in December against 0.1 percent growth in November.
- Investors get their first look at how the manufacturing economy is doing when the Philadelphia Fed releases its report on manufacturing activity in its region on Thursday. Economists expect the Philly Fed index climbed to 9.1 for January from 7.2 in December. Any number over zero represents growth
- The Fed releases its December report on industrial production and capacity utilization Friday. Economists expect that production grew by 0.2 percent against November's 0.1 percent, and that capacity utilization will come in at 75.7 percent compared with the previous 75.6 percent.
- Michigan releases its preliminary read on consumer sentiment for January on Friday. Economists don't put much stock in this one -- there's a world of difference between how people say they feel and how they act -- but the market often reacts. Expectations are for the sentiment index to climb to 88 from December's final sounding of 86.7.