Whichever way next week plays out on Wall Street, the market is likely to close out an October that stock investors would rather forget.
So far this month, the Dow is off 22.8 percent, the S&P 500 is off 24.7 percent and the Nasdaq is down 25.8 percent — putting them on track for their worst month since the October 1987 crash. In the S&P’s case, this October could wind up being its worst month ever in the post-World War II era.
Bears are expected to tighten their grip on Wall Street in the week ahead unless there are reassurances by the U.S. Federal Reserve and other central banks that authorities have what it takes to reduce the blows from the menacing economic downturn.
But there’s likely to be little comfort until the Fed issues its verdict on the economic outlook and the government releases its advance report on third-quarter real gross domestic product, due on Thursday.
The GDP data could well be the first negative print for this closely watched gauge of the U.S. economy’s health since the revised reading for the fourth quarter of 2007. GDP measures the output of all goods and services within U.S. borders.
“The outlook for the market really depends upon what type of action the Fed may take,” said Doug Roberts, chief investment strategist for Channel Capital Research in Shrewsbury, New Jersey. “I wouldn’t rule out the possibility of something on a coordinated basis globally as well.”
In addition to the Fed, the coming week will be jampacked with numbers — economic indicators including new home sales, consumer sentiment, a survey on home prices, plus durable goods orders and data on personal incomes and spending — as well as a deluge of earnings that could confirm investors’ worst fears that the outlook for profits and economic growth is becoming grimmer.
Investors will comb through the data and the earnings to get a sense of how deep a recession the United States may face as real estate values keep sliding, stocks continue falling and consumers keep pulling their purse strings even tighter.
The Federal Open Market Committee is scheduled to begin a two-day meeting on Tuesday to decide on interest rates. Their rate decision is expected on Wednesday afternoon at about 2:15 p.m. New York time.
Futures fully price in a rate cut of one-half percentage point, or 50 basis points, in the fed funds rate, to 1 percent from 1.5 percent. If that happens, the fed funds rate, which is the rate that banks charge each other for overnight loans, would be brought back down to where it was in late June 2003, when it was at 1 percent — the lowest in almost 40 years.
The interest-rate futures market also sees a “more than 20 percent” chance that the Fed could cut the fed funds rate more aggressively, to 0.75 percent — that’s right, to below 1 percent.
“I think that the anticipation is that the Fed will cut rates. The question is: How much?” said Bucky Hellwig, senior vice president at Morgan Asset Management in Birmingham, Alabama.
“A cosmetic rate cut probably won’t have much benefit to the market. Psychologically, a bigger-than-expected cut would confirm that the Fed is actually using every weapon at their disposal to try and make the downturn less painful.”
But while the Fed’s rate pronouncement will get attention, it is the central bank’s assessment of the economic conditions and outlook that investors will zero in on to decide whether they should buy, keep or sell stocks, with benchmark indexes at their lowest levels in more than five years.
Fed Chairman Ben Bernanke warned during a congressional hearing on October 20 that the U.S. economy could be dogged by an extended period of subpar growth and, as a result, a second economic stimulus plan might be needed.
Wall Street also will wrap up October, a month notoriously troublesome for stocks since the market crashes of 1929 and 1987. So any whiff of encouraging news next week could be fodder for the bulls.
It may not be coincidental that the last trading day of October 2008 happens to be Halloween.
The Stock Trader’s Almanac calls October the jinx month because of the crashes in 1929 and 1987, as well as the slide on October 27, 1997, the back-to-back massacres in 1978 and 1979 and Friday the 13th in October 1989.
Yet October sometimes turns out to be a “bear killer” or a turning point when bears, after gorging themselves on stocks, go into hibernation.
The threat of economic upheaval has rattled markets around the globe as panicked investors and institutions, including hedge funds, rush to liquidate risky positions to raise cash.
In a dramatic move before Wall Street’s opening bell on Friday, trading in U.S. stock futures were frozen several times as benchmark gauges hit levels that spur authorities to institute measures to prevent disorderly downdrafts amid a global slide.
Concern that the global economic downturn, sparked by the U.S. housing slump, might be deeper than expected drove U.S. stocks down sharply in Friday’s session.
For the week, the Dow Jones industrial average was down 5.35 percent for the week, while the S&P 500 was off 6.78 percent and the Nasdaq was down 9.31 percent.
The data on September new home sales is scheduled for release on Monday, while on Tuesday, investors will wade through the August S&P/Case-Shiller home price index and Oct consumer confidence.
Data on September durable goods is due on Wednesday, while weekly jobless claims will accompany the GDP report the following day.
The report on personal incomes and spending, which includes an inflation gauge watched closely by the Fed, is due on Friday, along with the Chicago PMI, and a measure of manufacturing activity in the U.S. Midwest.
On the earnings front, investors will focus on energy heavyweights Exxon Mobil Corp, due to post third-quarter results on Thursday, and rival Chevron, set to report on Friday.
Phone company Verizon, food maker Kraft Foods, consumer products giant Procter & Gamble, insurer MetLife and United States Steel Corp also are among the week’s marquee names set to report earnings.
The Fed’s roster of speakers includes Chairman Ben Bernanke, scheduled to address via satellite a symposium on the mortgage meltdown, the economy and public policy at the University of California at Berkeley. On Thursday, Federal Reserve Bank of San Francisco President Janet Yellen will speak at the UCal-Berkeley conference.
