Wall Street sobered up fast this New Year, and it's very likely worries about the economy will keep markets on edge in the week ahead.
It's hard to imagine as bad a first-week-of-the-year performance. The Dow was down 4.23 percent, and the S&P 500 lost 4.52 percent. The Nasdaq tumbled 6.35 percent for the week, after a shocker 98 point drop Friday.
Friday's jobs dataconfirmed for some that the economy is weakening, and fears of recession flared on Wall Street. Some economists changed their forecasts for the Fed following the data, and it would not be surprising to see forecasts for growth get trimmed.
Both Goldman Sachs and J.P. Morgan now predict the economic slowdown could prompt the Fed to cut by a half point when it meets at the end of January. In fact, Goldman says the Fed could even trim its target Fed funds rate before Jan. 30 if there are signs the consumer is slowing down.
The big thing to watch in the coming week is how the markets themselves react. But also on the agenda are multiple Fed speakers including the big man himself. Fed Chairman Ben Bernanke speaks on the economic outlook in Washington on Thursday at 1 p.m.
Before that, President Bush will talk about the economy mid-afternoon Monday, and Treasury Secretary Hank Paulson will speak at 2 p.m. that day on the economy and the capital markets in New York.
In those speeches, some economists expect to hear more about the Administration's mortgage plan and also possible hints as to whether there will be an economic stimulus package introduced by the White House later in the month.
The official start of corporate earnings season comes Wednesday, when Dow component Alcoaissues results, plus there are a number of major corporate events including J.P. Morgan's annual healthcare conference Monday to Thursday in San Francisco. This is the health care industry's first big event of the year, drawing hundreds of companies and a crowd of nearly 8,000.
The big tech and media event of the week is the Consumer Electronics Show in Las Vegas, where NBC and CNBC are the show's official broadcast partners. "Power Lunch" will be live from there Monday and Tuesday, and Maria Bartiromo will host "Closing Bell" there Monday through Wednesday. The latest in gadgets and mobile technology will be on display, and CNBC and CNBC.com will have full coverage.
It certainly was a tough week for stocks, deflating those hopes for an early January rally.
Laszlo Birinyi, whose Birinyi Associates issues much insightful research, released a report Thursday saying the bottom of the trading range for the S&P 500 is 1,378, another 3.5 percent decline. It closed Friday at 1411.63.
The note said "another 3 or 4 percent drop would be disconcerting." But "Down there would be a good range to buy," he said in a phone interview.
Interestingly, Birinyi said for the first time ever he is not developing a market forecast this year because of the way stocks are trading.
"It's not useful to make long-range forecasts in a short-term market," he said. "You're seeing a market that's been in a trading range for three or four months... Looking out three to five months, we're thinking its going to be more of the same."
Birinyi said the market has already created some opportunities, depending on an investors' objectives. He said he is buying American Express in a trading play because in the upper $40s per share, it's a good opportunity compared to its previous price in the $60s.
"You look for stocks which are participating in the markets decline in the same way," he said, noting American Express was at the lower end of its range and he was comfortable buying it. But he added that some investors buy stocks in trading plays and others buy them for the longer term, and each requires different analysis. One of the others stocks that he sees as a trading oppurtunity is Federal Express.
Birinyi in his note pointed out that the five weakest S&P sectors are within five percent of their potential lows, and "equally important is that of the ten sectors only energy is an uptrend."
Birinyi also says it is likely the economy is already in a recession. "I think there's a better case to be made, saying we are in a recession," he said. In a recent report, he noted most recessions were declared well after they started and some weren't declared at all.
For instance, the recession that started in July, 1990 ended in March, 1991, but was not declared until April, 1991. Likewise a recession that started in January 1980 was not declared until a month before it ended in July, 1980. Recessions are typically declared after two quarters of negative growth.
Certainly, Birinyi is not the only one who sees a recession. Yet with all the gloom out there, it is remarkable that most strategists and economists, surveyed by CNBC and other organizations recently are not predicting a recession. However, many do say the risk of one has increased. Those forecasts could start to shift if other data confirms the jobs weakness.
Late Friday, Citigroup's chief U.S. economist put out a note saying "unambiguously restrictive financial conditions and faltering economic growth" are greatly increasing the chances of a major Fed easing cycle, a recession or possibly both.
RBS Greenwich Capital chief economist Stephen Stanley said Friday afternoon that he has not changed his forecast to recession. "The risks of such a scenario playing out are definitely higher. We want to see a little more data. Any one reading of these indicators can be an anomaly, particularly in the employment numbers," he said.
Stanley said in a telephone interview that he recently changed his expectations that there would be no January rate cut to the likelihood of a quarter point cut. Yet, he said he is now open to the idea that it could be a half point cut to the target Federal funds rate.
The speculation for deeper and faster rate cuts comes as the sharp runup in commodities prices has Wall Street wrestling with the idea that maybe the Fed will be reluctant to make deep cuts because of the threat of inflation. But there is a growing expectation the Fed may need to act aggressively to stem economic decline.
A supercharged commodities rally in energy, metals and grains, more safety-buying in Treasurys and a near four percent drop in the dollar against the yen were market highlights in the past week. The dollar was also down one percent against the euro. Ten-year Treasurys saw yields drop to 3.854, the lowest level in a month, and the two year is at a three year low of 2.732 percent.
Oil was up 2 percent for the week, closing at $97.91 per barrel. Oil rose Thursday to a new high just above the magic $100 level but then trended lower, even after Thursday inventory data showing tight supplies. Traders said it appears oil got ahead of itself and fear the economy is slowing was a stronger force.
There's not much on the data front this coming week. On Tuesday, pending home sales are reported at 10 a.m. and consumer credit is at 3 p.m. On Wednesday, oil inventories are reported. Thursday has weekly jobless claims at 8:30 a.m. The Bank of England and European Central Bank have policy statements that day at 7 a.m. and 7:45 a.m. New York time, respectively. Wholesale trade is reported at 10 a.m. Thursday. International trade and import and export prices are at 8:30 a.m. Friday.
Fed speakers include Atlanta Fed President Dennis Lockhart, who speaks Monday on the U.S. economic outlook in Atlanta. Philadelphia Fed President Charles Plosser speaks Tuesday on the economic outlook and Boston Fed President Eric Rosengren speaks that day at an economic conference in Connecticut.
St. Louis Fed President William Poole speaks Wednesday on subprime mortgages in St. Louis. Kansas City Fed President Thomas Hoenig speaks Thursday in Kansas, the same day Bernanke speaks in Washington. Fed Governor Frederic Mishkin speaks on financial markets risk and policy in New York at 1 p.m. Friday and Rosengren speaks in Vermont at an outlook conference that day.