Wednesday Look Ahead: Markets on Alert for Fed Economic Comments

More disappointing economic news sapped stock prices Tuesday, making the Fed's comment on the economy Wednesday a bigger event than it might otherwise have been.

Oliver Quilla for

The Dow fell 148 points or 1.4 percent to 10,293, and theS&P 500was down 17 points or 1.6 percent to 1095. Traders were particularly concerned that the Dow Transports lost 3.9 percent as the stocks in that index are a barometer for economic activity.

The disappointing data du jour was existing home sales for May, down 2.2 percent, as opposed to the 5.5 percent gain expected by economists. Wednesday's data highlight is new home sales at 10 a.m., another indicator expected to show sluggishness. The Fed winds down a second day of meetings, with its 2:15 p.m. statement. Economists expect no change in policy from the Fed, but they do say it could tweak its language on the economy.

Energy stocks, down 2.7 percent, were the worst performing of the S&P large cap sectors Tuesday. Drillers were among the weakest performers, after a federal judge in New Orleans ruled against the Obama Administration's six-month moratorium on deepwater drilling in the Gulf of Mexico. The stocks reacted positively initially but turned lower as the Administration said it would appeal the ruling, further muddying the outcome. BP shares neared a 14-year low.

Peter Kenny, managing director at Knight Equities, said the market's sloppy behavior really started Monday, when stocks gave up an early rally to close lower. "Market internals were weak. It really bled into the session today. We made an effort early to gain some traction," he said. He said energy and financials added to the negative tone.

"Concern of the double dip is becoming more of a self-fulfilling prophecy in spite of the fact we've had sequential GDP growth and substantial earnings improvement," he said. Kenny said the market needs the Fed to hold steady and not turn more cautious on the economy.

Sterne, Agee and Leach chief investment strategist Sharon Stark said the Fed is aware of the market's perception that the economy could be heading for a double dip.

"I don't think the Fed's going to say anything to sort of ignite that thought process. It's already in he market. If anything, I think they'll try to calm the market but continue to acknowledge there are still some risks out there because of the economic problems in Europe and the potential spillover into the U.S. economy," she said.

"I think they'll be cautious, but I don't think they'll say the risks are now slanted toward a weaker economy. I think they'll say the economy is in recovery. They'll expect it to be a bumpy road. I don't think they'll use that word, but the indication is it's not going to be smooth sailing going forward," she said. "They could make things worse by acknowledging the fact that conditions are softer but I don't think they need to say that. It's already built into the market."

Stark does not expect a double dip recession. Her forecast for second quarter and third quarter GDP growth is 2.5 percent each quarter. She did say the third quarter may end up being weaker than her forecast. "I really don't see a double dip. To me, 2.5 percent growth is still growth. It's not great, buy you still have growth. I don't see us contracting unless there's another significant hit to the economy," Stark said.

"I'm still concerned about the housing market. I'm not as optimistic as some other economists are. I think conditions are weak," she said, noting the home buyers tax credits and foreclosures stimulated sales. "I think existing home sales will stay soft until we see meaningful job growth in this country.

Markets are also anticipating the auction of $38 billion in 5-year notes at 1 p.m. Wednesday, after Tuesday's 2-year note sale came in at a record low yield of 0.738 percent.


Apple's latest iPhone starts arriving in mail boxes Wednesday, and the droids are fighting back.

Executives from Verizon,Google, Motorola and Adobe will launch the next generation of Droid at 1 p.m. in New York.

Adobe, in its own special battle with Apple, reported an 18 percent increase in second quarter profits Tuesday. Adobe said the public debate about its Flash software has not had an impact on its Flash business. In a slap at Apple, Adobe CEO Shantanu Narayen said those that don't have Flash on their smart phones will wish they did.

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