MARKET SNAPSHOT: U.S. Stock Market Outlook: Greece Fades, Fed Looms
03/10/2012| 12:06am US/Eastern
By Sue Chang, MarketWatch
SAN FRANCISCO (MarketWatch) -- After riding the Greek-debt roller coaster for more than two years, U.S. investors may finally get some respite next week, shifting focus to the Federal Reserve and whether the Dow average can retest 13,000.
"We should be able to put Greece in our rearview mirror," said Myles Zyblock, chief equity strategist at RBC Capital Markets.
The Greek government on Friday announced that 83.5% of its private-sector creditors agreed to a bond-swap deal, moving Greece closer to securing a crucial second bailout, which could get finalized next week.
Because the rate was short of 90%, Athens exercised collective-action clauses to force more bondholders to participate. That move prompted the International Swaps and Derivatives Association committee to declare a "restructuring credit event," which will trigger a payout of some $3.2 billion in credit default swaps on Greek debt.
As ominous as that sounds, the triggering of Greece's CDS is not expected to have a lasting impact on the stock market, according to Zyblock.
Stocks trimmed gains after the ISDA announcement but closed moderately higher, extending gains to a third day. The Dow Jones Industrial Average (DJI) edged up 0.1% to close at 12,922.02 Friday, about 80 points shy of 13,000. The S&P 500 (SPX) rose 4.96 points, or 0.4%, to 1,370.87, while the Nasdaq Composite (RIXF) climbed 17.92 points, or 0.6%, to 2,988.34.
For the week, the Dow posted a slight loss while the S&P and the Nasdaq both extended their weekly winning streaks to four.
Overall, any decline in stocks isn't likely to be long or drawn out, and should be viewed as an opportunity to bargain hunt, Zyblock added.
"There will be volatility but the index will not drop that much," he said.
As Greece fades from the investment radar for the time being, domestic issues will take on increasing importance.
The Federal Open Market Committee will meet on Tuesday to decide on the monetary policy. Expectations are low that it will jolt markets.
"The March 13 meeting of the Federal Open Market Committee is likely to be a more routine affair than the policymakers' last meeting in January. We expect no new policy or communications initiatives to arise from this one-day meeting," said Neal Soss, chief economist at Credit Suisse, in a research note.
Jerry Webman, chief economist at OppenheimerFunds, said for the most part, the Fed is expected to stick to the manual and say something along the lines of "if we get Papa bear or Baby bear's porridge, expect the Fed to adjust monetary policy to warm it up if it's too cold or cool it off if it's overheating," Webman said.
Investors are also expected to listen closely for hints on additional quantitative easing, or what's known as QE3, according to Zyblock.
"But it will be difficult to talk about QE3 when jobs are being created," he added.
Still, given the rise in energy prices and improving labor data, one can't completely rule out changes in the FOMC statement, according to Soss.
"We believe [Ben] Bernanke, and his many like-minded colleagues on the FOMC, are more concerned about the headwinds that higher gasoline prices might impose on economic growth than about gasoline's potential influence on general price levels and inflation expectations. The menu of policy responses, then, ranges from doing nothing to easing further," Soss noted.
One strategy the Fed is considering is boosting liquidity without fueling inflation via "sterilized" bond purchases, the Wall Street Journal reported Wednesday. This would entail the financial authorities printing more money to buy long-term debt but tying up the money through reverse repurchase agreements, the Journal said.
And if the Fed fails to deliver on market-moving news, there will be plenty of economic indictors to provide action.
Attention will focus on the trio of weekly jobless claims, the Empire State index and the Philadelphia Fed's manufacturing index all due on Thursday.
This week, the Labor Department said initial claims rose by 8,000 to a seasonally adjusted 362,000 in the week ended March 3, the highest level in five weeks.
"There is no reason not to expect 350-ish trend," said Webman. "There was a small tick higher so we will watch to see whether the momentum is softening," he said.
On the whole, the market is not very sensitive to regional data like the Empire State index and the Philly Fed. But investors are likely to be more attentive next week as they will provide a better sense of whether the recent "hiccup" in the Institute for Supply Management index is real or not, according to Zyblock.
The ISM said earlier this month the manufacturing index declined to 52.4% in February from 54.1% in January.
The Empire State index rose to 19.5 in February, its highest since June 2010, while the Philly Fed index also climbed to 10.2 in February to reach the highest level since October.
Urban Outfitters, Ross
News-wise, it will be a slower week for the corporate sector with only a couple of S&P 500 companies reporting.
Urban Outfitters Inc. (>> Urban Outfitters, Inc.) is expected to report weaker fourth-quarter earnings when it releases results on Monday. Analysts projected the apparel retailer to earn 29 cents a share, down from 45 cents a share a year earlier, according to a FactSet Research survey.
Ross Stores Inc. (ROST), which will release on Thursday, is forecast to report fourth-quarter earnings of 84 cents a share, up 23% from a year earlier.
"We are pretty much through with earnings for now so investors should look more at fundamentals," Webman said.
And he thinks fundamentals aren't too bad.
"They are stolid but solid," he said. "If the Fed says nice things, the European debt problem is calm, and economic releases are favorable, there is a chance we can break through 13000."
Zyblock also believes there is potential for the benchmark index to successfully test and defend 13,000 points, if not next week then within a short period.
"There is 10% more upside from today's level," he said.
But Webman also cautioned against focusing too much on the Dow. It's too narrow and it makes people susceptible to a lot of random noise, he said.
"Looking at it [the Dow] tells you something but it shouldn't define your investment strategy," he said.
Instead, investors should concentrate on economic fundamentals and picking the right companies to invest in.
"In a pretty good rally like this one, people should be more selective and really focus on earnings potential and how much they are paying for it," Webman said.