Spending plans provide insight
NEW YORK – In Roman mythology, Janus is the god of doorways, and January is in turn the doorway of the year. For Wall Street, this first month of 2008 has brought none of the optimism that the myth implies – instead, a disappointing stream of economic and earnings reports has investors dreading what’s still to come.
With investors worried that the credit crisis is worsening and that a recession is all but likely, the Standard & Poor’s 500 index fell nearly 10 percent in the first 18 days of 2008. This month is shaping up to be the worst January on record for the well-tracked index since 1970, when blue chips shed 7.65 percent.
And Wall Street analysts warn investors not to expect corporate earnings to bail out stocks. About 60 members of the S&P 500 have reported results, most of them failing to surpass Wall Street projections.
“We keep waiting to see that other shoe drop, and so far corporate earnings are doing terribly,” said Howard Silverblatt, S&P’s senior index analyst. “Because of all the bank write-offs, the fourth quarter is basically history.”
Major global banks and brokerages wrote down about $90 billion worth of bad debt during the fourth quarter because of exposure to risky subprime mortgage securities. And, more importantly, top banking executives still aren’t willing to say they’ve reached bottom.
Disappointing results from financials like Citigroup Inc. and Merrill Lynch & Co. weighed on Wall Street this past week, and contributed to the market’s huge swoon that took the S&P 500 down 5.4 percent and the Dow Jones industrials down 4.02 percent. There were some bright spots – both IBM Corp. and General Electric Corp. surpassed expectations and put investors at ease about their prospects for 2008 – but overall, the market’s sentiment about earnings was bleak.
Silverblatt and other analysts believe investors should focus on what companies are saying about this year – not what happened during the last three months of 2007. What companies have to say about capital spending – money set aside for everything from buying computers to building new factories – will be a key indicator for how they feel about the future.
But while the market does look to the future, the disappointments of the fourth quarter – and companies including chip maker Intel Corp. were among them – can’t help but pull investor sentiment down.
“I think it is unlikely to see a dramatic pickup in the number of companies beating expectations,” said Michael Thompson, director of research at Thomson Financial. “I don’t think it gets a lot worse, and I’m not sure I would try and raise expectations that ratio will improve dramatically.”
But, he warns, “it’s still early.” With the bulk of the financial companies out of the way, there are still a little more than 400 blue chip companies left to report, including industry leaders like Apple Inc., DuPont Co., and Johnson & Johnson.