The Weekly Market Preview — 1/8/2008

All eyes on Fed Chairman Speech this Thursday

This week, I don’t think we’ll see any news or economic data that will help investors get their arms around the market and provide a catalyst.

The prospect of a U.S. recession came after new data from the December U.S. employment report revealed a sudden increase in unemployment and weak job creation: causing a drop in the U.S. stock market last week and sending both stocks and bond yields lower. After its biggest first session point drop ever, the Dow fell 4% in the short trading week, the S&P was down 4%, and the Nasdaq was down 6%. I expect the U.S. markets to drop further this week. Last weeks news on employment and oil at $100 a barrel was tough to swallow.

However, going into this week, all eyes will be on the speech given by Fed Chairman Ben Bernanke. At Thursday meeting, most investors are expecting him to give some sort of economic outlook and to comment on monetary policy as well as give an assessment of where the markets are heading. We are all trying to assess whether the Federal Reserve can cut interest rates more aggressively in an attempt to prevent the economy from sliding into recession. According to published reports, Fed members agreed last month that they might have to cut interest rates again as credit and housing markets started affecting consumer spending. Many see the potential for a vicious cycle pulling down the markets and the economy if something isn’t done and done quickly.

Markets typically benefit from periods of Fed rate cutting, which lowers borrowing costs and encourages more risk-taking. One of the areas this is first seen in is equity investments. But this time around, many on Wall Street remain unconvinced that lower rates will be enough.

Earnings this week
The kick-off of fourth-quarter earnings season also gets under way this week. While no big market movers are due to report this week, investors will seek to get more evidence of a boost to profits from global growth when aluminum giant Alcoa reports. Alcoa will announce earnings on Wednesday after the market close. The whisper numbers—or expectations by some Wall Streeters—are broad. They could be anywhere between 25 cents a share to 65 cents. This wide disparity in estimates creates the potential for a big earnings surprise for the stock. I don’t think this will have much impact on the markets.

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