Weekly Markets Commentary – April 14, 2008

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Stocks Tumble

After absorbing a series of mixed, first-quarter earnings reports earlier in the week, stocks finally succumbed on Friday after General Electric surprised just about everyone with a miss of its own. This came just weeks after assurances that GE’s quarter and full year earnings looked solid. The disappointment sent stocks tumbling.

The Dow Jones Industrial Average, of which G.E. is a component, fell 256 points on the day, on its way to a 2.3 percent decline for the week. Other major averages fared even worse. The S&P 500 Index lost 2.7 percent, and the Nasdaq Composite Index slid 3.4 percent.

First quarter earnings got off to a rocky start on Monday when Alcoa reported a 54 percent earnings decline. A subsequent warning from UPS only added to the gloom. One relative bright spot came in the middle of the week when Wal-Mart bucked the trend among retailers in reporting decent results for March.

Overall, the nervousness quotient surrounding earnings season was ratcheted up several notches by the G.E. report. Investors were expected bad news from financial and consumer stocks, but if a company as diverse as General Electric disappoints, then, the thinking goes, what lies ahead?

True, it did blame the Bear Stearns episode for preventing it from selling some real estate holdings, but the results in other operating divisions was less than overwhelming. Earnings anxiety will only increase this week, as the focus will turn to financials for a string of reports.

Earnings Reports

J.P. Morgan Chase, Wells Fargo, Merrill Lynch, Citigroup, and Wachovia are all scheduled to report first quarter results. Beyond financials, such sector bellwethers as Johnson & Johnson, Intel, CSX, IBM, Coca-Cola, Abbott Labs, eBay, Google, Pfizer, United Technologies, Schlumberger, and Caterpillar are all on the calendar.

Economic Reports

If earnings alone aren't enough to induce high anxiety this week, then the economic calendar is happy to oblige. March retail sales, housing starts, industrial production and capacity utilization are scheduled for release. In addition, both producer and consumer prices will be released and are expected to remain elevated.

One of the main culprits in exerting upward pressure on headline inflation has been commodity prices. Last week crude oil reached a record high price of $112.21 a barrel, before retreating to end the week at $110.14, still higher by $3.91. The increase was attributed to a drawdown in U.S. supplies and rising import volumes in China.

Grain prices were mixed, although corn hit a new record high midweek before it experienced some selling pressure. Metal prices were also strong, as tin touched a record high and copper nearly did the same. Gold climbed $13.80 an ounce, to $927.

None of this will make the Federal Reserve’s job any easier. The Fed meets again in two weeks and is expected lower interest rates once again. Last week, the European Central Bank left its overnight rate unchanged, accentuating the differing paths of monetary policy between the two institutions.

The dollar briefly fell to a new low against the euro, before recovering slightly. Nevertheless, it still fell. The Bank of England cut its rates by a quarter-point, pushing the pound modestly lower.

Last week, the International Monetary Fund released its new economic forecast for 2008 and it expects growth to be sluggish in developed economies, particularly in the United States. The IMF expects only 0.5 percent growth in the U.S. in 2008, compared to 2.2 percent growth in 2007. In the Eurozone, the IMF now expects 1.4 percent growth versus 2.6 percent last year. In Japan, it expects 1.4 percent in 2008, compared to 2.1 in 2007.

The experience in developing economies will be appreciably better by comparison, but still lower year-over-year. For example, the IMF is forecasting that China will grow at a pace of 9.3 percent this year, down from 11.4 percent in 2007 (and since revised even higher by the Chinese government).

The IMF looks for India to slow to 7.9 percent in 2008, from 9.2 in 2007. It expects Russia to retreat to 6.8 from 8.1, and Brazil to fall to 4.8 from 5.4. Overall, the expected 2008 IMF growth rate of 3.7 percent compares to five percent in 2007, and is down 0.5 percent from the International Monetary Fund's January forecast.

There was little for investors to cheer last week. For the week ahead, it may be asking too much to expect any good news. Rather, it may be a victory just to survive to fight another day. And, to add insult to injury, in case anyone has forgotten, Tuesday is tax day.