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Market Insider: The Week Ahead

The stumbling economy and the specter of a rough earnings season will pressure stocks in the week ahead.

As the credit crunch continues to bite into corporate and consumer activity, economists are paring back expectations for the economy into 2009. Investors are increasingly responding to the likelihood of a global recession by pushing the dollar higher and selling commodities.

Goldman Sachs economists Friday said they see a deeper than expected U.S. recession because of poor economic data and the sharp deterioration in financial conditions. They see declining GDP in the fourth quarter and first quarter, 2009 and an unemployment rate of 8 percent by the end of 2009. Unemployment is currently 6.1 percent.

The market obsessed in the past week over the financial bail out bill which gives the government $700 billion to sop up bad debt from financial firms. After a false start, Congress gave the plan its final endorsement in a House vote Friday. Yet stocks finished sharply lower, erasing a big gain and taking the Dow on a more than 480-point roller coaster to end the day off 157, or 1.5 percent.

Traders say there is fear the bail out package is too late to reverse the damage being done by the credit crunch, which has stalled the ability of some companies to raise short term capital and had made bank lending spotty.

Hundred Dollar
Bill Haber
Hundred Dollar

So now traders believe the next move belongs to the Fed. "You're going to hear Bernanke out there chirping," said one trader, pointing to Fed Chairman Ben Bernanke's statement Friday endorsing the bill and promising that the Fed would use all its powers to ease the credit crunch.

"We're on alert for Sunday night for one thing. We want to hear that they are going to pay interest on reserves or cut the Fed funds rate. One or the other," said Kevin Ferry of Cronus Futures Management.

Traders expect the Fed to slash the current 2 percent target Fed funds rate by a half point before its next meeting, Oct. 28.

In the past week, the Dow lost 7.3 percent to 10,325, its biggest weekly drop since July 2002. The S&P 500 slumped 9.4 percent to 1099, its lowest close in four years. The Nasdaq lost 11 percent to 1947. While stocks melted, the dollar rose 5.8 percent in its biggest weekly move ever against the battered euro.

Econorama

In the coming week, there are a few key economic reports, including the Fed's minutes from its last meeting released Tuesday. Consumer credit is also reported Tuesday. Pending home sales are released at 10 a.m. Wednesday, and weekly jobless claims and wholesale trade are reported Thursday. On Friday, international trade and import prices data are released.

Over the weekend, French President Nicolas Sarkozy will host a summit on the financial crises with leaders of Germany, Britain, Italy, and the heads of the European Commission and European Central Bank. Currency traders are watching this gathering closely as the troubled European banking sector becomes an increasing source of problems for global markets and has weakened the euro.

Traders are also watching the U.S. banking sector where Wells Fargo , one of the healthiest U.S. banks, swept in with a merger offer Thursday night to beat out Citigroup's bid for Wachovia. Citigroup is protesting Wachovia's new merger deal. It's own plans to merge with Wachovia , attractive to Citi for its wealth of deposits, was brokered by the FDIC.

Bernanke speaks at the National Association of Business Economists meeting in Washington Tuesday, and Lehman Brothers CEO Richard Fuld will be on Capitol Hill answering questions on his firm's demise before the House Oversight Committee. On Tuesday, former AIG officials come before that committee.

Earnings Central

The official start of the earnings season begins Tuesday with Alcoa , the first Dow component to report. General Electric , the parent of CNBC, reports Friday. GE has reduced expectations and also raised funds this past week through an investment from Warren Buffett and a $12 billion stock offering.

Analysts have been expecting a weak quarter, with lots of negative forecasts. "We were looking for the third quarter to be down. We were thinking down maybe 10 percent. I would say more now, given what's happened in the last part of the quarter," said Stuart Freeman, chief equity strategist at Wachovia. Freeman said the previous market winners, commodities and energy related companies should show year over year declines in earnings.

Freeman said he expects stocks to remain choppy through year end. "We were looking in the 1400 area (on the S&P 500). We're looking to adjust that to the downside. Clearly, what happened here is kind of like a geological shift," he said.

The credit crunch in the past several weeks accelerated with the ripple effect from the Lehman bankruptcy and other near failures in the financial industry. Investors have flocked to the safety of short term Treasury securities, and have shunned many other investments. Libor, the London interbank lending rate, has shot up dramatically and three-month Libor was at 4.3338 percent Friday. Plenty of corporate and consumer loans are set based on Libor.

"We do believe we're going through a recession for the rest of the year and perhaps halfway through next year. It's also the case that the market tends to look through a bottom for these kind of things," Freeman said.

"We're going to find companies are growing less aggressively," he said. Consumers will also pare back spending even more. "We did have a period where banks were helping them, but consumers did about eight years of spending in four years."

Traders have been worried that substantial losses by hedge funds that will result in redemptions that fuel even more selling of stocks. "I think we've already seen some of this," said Freeman. "I t think it's a factor we could see bring equities down further. When you're in this kind of environment, valuation isn't really what brings you to the bottom."

He said in an emotional market, hysteria can build and result in further redemptions, making stocks look even cheaper. "We're still comfortable as we look out to 1575 (target on the S&P) for next year. It doesn't seem out of line, but again we're continually adjusting these numbers as we watch how this liquidity crunch goes and we watch how the bond market unlocks, and we will be watching it on a weekly basis," he said.

Getting Technical

Technical analysts were watching to see if the Monday low created by the failed House vote would hold. After a week of absorbing headlines and hanging on, Friday's dismal action signals there may be another leg down coming, said Scott Redler, chief strategic officer of T3Live.com.

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"Basically, the market tried to pound out a bottom at 1110 to 1120 on the S&Ps and 10,300 to 10,400 on the Dow," said Redler. "Then the market consolidated for the rest of the week waiting to see the reaction and the passage of the Congressional bill, which actually had already been priced in."

Redler said there's a probability "we're going to see one more capitulation opportunity that would create a buying opportunity at Dow 9600 to 9800 and 1040 to 1050 on the S and P. We're not looking to sell into this last down move. We're looking for a major opportunities for the short and long term to buy into those levels."

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.