Investors look for signs the worst is over

NEW YORK —  With little question that the U.S. is in the grip of a recession, investors this week will lean on a stream of earnings and economic reports to help determine exactly how prolonged and painful the downturn might be.

There’s certainly been fresh evidence that the credit market has begun to thaw. But that alone might not be enough to restore confidence in the stock market at a time when investors are clamoring for stronger signs of a bottom.

Trying to predict a floor for major U.S. stock market indexes has proved to be a difficult task. Wall Street ended a volatile two-week run fairly stable on Friday, and there were indications that bank-to-bank lending rates eased and that some companies returned to the bond market to raise cash.

Those indicators might have previously been enough to reassure anxious investors that the worst is over for the stock market. However, amid a financial crisis not seen for decades, analysts still remain cautious.

“If you can survive the whiplash of this bottom formation, then stocks look ridiculously cheap,” said Edward Yardeni, president and market analyst at Yardeni Research. “But there are bigger questions. Investors still want to see the light of day in this credit crisis, and they want to know if the current recession will be relatively short and shallow.”

He said the biggest question facing Wall Street was whether the stock market’s current levels had priced in all the pain that goes along with a recession. Indexes could slip even further if the market is sideswiped by a disappointing batch of economic news or dour corporate reports.

Traders return to work today with a bit of history lingering over the session. Sunday marked the anniversary of the 1987 stock market crash known as “Black Monday.” The Dow plunged 22.6% that day to mark the largest one-session percentage decline ever.

The blue-chip index that tracks 30 of America’s biggest companies will begin trading at the 8,852.22 level, down 37.5% from its record closing high of 14,164.53 set Oct. 9, 2007.

The last time Wall Street reached such a cathartic level was during the last bear market, when the Dow fell 37.8% from a close of 11,722.98 on Jan. 14, 2000, to 7,286.27 on Oct. 9, 2002. However, then investors didn’t have to worry about a recession blocking a rebound.

Jack Ablin, chief investment officer at Harris Private Bank, said the biggest signs that a bottom had formed would be how investors react to bad news this week. He believes investors have engaged in “slash-and-burn selling” with all the news converging at once, and a change in that pattern will be telling.

“I think the bad economic data and earnings are already priced in to an extent,” Ablin said. “What I’m looking for is a disconnect with investors where bad economic news or a bad earnings report is greeted by a rally, that will be telling about which direction we’re heading.”

Ablin points out that earnings reports and economic data are mostly backward-looking and in most cases reflect conditions before the meltdown hit its peak in the last few months. He’s interested in what chief executives have to say about their companies going forward.

The consensus among many analysts is that companies will begin to curtail their projections for the fourth quarter because of deteriorating growth. There have been a number of reports already out from companies such as Google Inc. and Honeywell International Inc. that overall have not been as bad as feared.

This week, a larger swath of America’s business community is set to release results. Among the companies are Dow components AT&T; Inc., Caterpillar Inc., 3M Co., Boeing Co., Microsoft Corp. and McDonald’s Corp. Others include Amazon.com Inc., UPS Inc. and Altria Group Inc.

Economic reports this week include September’s index of leading U.S. economic indicators today. Other big reports include Thursday’s weekly U.S. jobless claims and Friday’s report on existing-home sales.

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At a glance

Today

Federal Reserve Chairman Ben S. Bernanke testifies before the House Budget Committee.

Conference Board releases leading indicators for

September.

Weekly Treasury auction.

Quarterly earnings reports due from Mattel, Netflix and Texas Instruments.

Tuesday

Quarterly earnings due from Apple, McClatchy, Yahoo, Caterpillar, UAL,

UnitedHealth Group and

US Bancorp.

Wednesday

House Oversight and Government Reform Committee hearing on credit rating

companies.

Quarterly earnings report due from Amgen, Northrop Grumman, Boeing, McDonald’s and WellPoint.

Thursday

Labor Department releases weekly jobless benefit claims.

Freddie Mac releases weekly mortgage rates.

House Oversight and Government Reform Committee hearing on federal financial regulators. Among those invited to testify are former Federal Reserve Chairman Alan Greenspan, former Treasury Secretary John Snow and Securities and Exchange Commission head Christopher Cox.

Quarterly earnings reports due from Dow Chemical, JetBlue Airways, Microsoft, US Airways Group and Xerox.

Friday

National Assn. of Realtors releases existing-home sales data for September.

Quarterly earnings report due from Gannett.

Source: The Associated Press