Wall Street: the week that was: Wall Street climbs wall of worry, eyes Fed decision

NEW YORK: Wall Street has regained some of its upward momentum as investors look past the latest economic and corporate woes and pin their hopes on an easier money policy from the Federal Reserve.

Analysts say the snapback in the past week, coming on the heels of a big drop in the prior week, has been based on hopes of a rate cut October 31 from the US central bank and that the market remains fragile. In the week to Friday, the Dow Jones Industrial Average gained 2.1 percent to 13,806.70, rebounding from a four percent slide the prior week.

The broad market Standard and Poor’s 500 index advanced 2.31 percent to 1,535.28 and the tech-heavy Nasdaq rallied 2.9 percent to 2,804.19.

The past week was marked by signs of more turmoil in housing, with data showing a flood of unsold properties growing and existing home sales falling to fresh lows.

Further troubles emerged in the financial sector with Merrill Lynch writing off some eight billion dollars in soured investments.

The market also shook off record high oil prices and fresh lows for the dollar against the euro. But analysts say the market is looking ahead to a more friendly policy stance from the central bank, whose Federal Open Market Committee meets Tuesday and Wednesday.

The Fed last month cut its base rate by half a percentage point to 4.75 percent to ease housing and credit market stress and many expect a further reduction.

“Clearly the market will focus on Wednesday’s FOMC rate and credit policy decision,” said Gregory Drahuschak at Janney Montgomery Scott. “Increasingly it has become obvious that the market wants another rate cut. The ideal that should satisfy the market is a 25 basis-point cut. More than this could generate worries that the economy is getting too weak.”

Lehman Brothers economist Ethan Harris argues that the Fed needs to keep cutting rates in the face of a deepening housing crisis that threatens to drag the entire economy down. Harris predicts a cut of 25 basis points and three more cuts in the coming months to bring the federal funds rate down from the current 4.75 percent to 3.75 percent.

“We continue to disagree with the consensus forecast of a pickup in growth next year,” Harris said in a note to clients. “In the past six months, despite the Fed’s best efforts, financial conditions have tightened and the housing market imbalance has worsened considerably. Some sectors will cushion the housing shock, but none seems capable of driving stronger growth.”

Fred Dickson, market strategist at DA Davidson amp; Co., said he expects more choppy market action in view of the uncertain economic environment.

“The combination of a falling dollar, rising gold prices, horrible news on the housing front, record crude oil futures prices, mixed third quarter earnings reports pointing to a slowing domestic economy, tepid fourth quarter guidance, and the threat of more big mortgage related write-offs by financial institutions would normally be a sure fire prescription for a significant market pullback.”

Dickson said traders appear to be betting heavily that a rate cut “will be the catalyst to reawaken the bulls” but he is less confident.

Bonds held firm amid the uncertain economic outlook. The yield on the 10-year Treasury bond eased to 4.389 percent from 4.401 percent a week earlier, and that on the 30-year Treasury dipped to 6.683 percent from 4.689 percent. Bond prices and yields move in opposite directions.

In the coming week, the market will see the first estimate of US economic growth for the third quarter, expected to show a 3.1 percent annualized pace, although analysts say the report is backward-looking. More significant may be Friday’s report on nonfarm payroll growth, seen as one of the best indicators of economic momentum, expected to show 90,000 new jobs created in October. afp

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