06-06-2004, 03:18 AM
Goldilocks Economy' Could Be Pure Fantasy
Sat Jun 5, 1:21 PM ET Add Business - Reuters to My Yahoo!
By Dick Satran
NEW YORK (Reuters) - A not-too-hot and not-too-cold economic story has warmed the hearts of Wall Street investors for months.
Stocks rose Friday after the release of a long-awaited jobs report that showed an economy that still isn't growing fast enough to require drastic tightening by Alan Greenspan (news - web sites)'s Federal Reserve (news - web sites).
But Wall Street's Goldilocks tale might need a bit of revising soon, and maybe Britney Spears could take the starring role. Like Spears, who was asked by the Chinese government not to dress too hot on her concert tour there next year, investors may want to turn down the heat.
"There's going to be earnings disappointments coming by the third quarter," said Peter Wall, chief investment strategist for Chase Personal Financial Services. "We don't think the forecasts that are out there reflect the changes in the economy."
INFLATIONARY PRESSURES
As corporate hiring continues to surge, wage demands could add to the inflationary pressures already presented by rising oil and commodity prices. Even if that doesn't rattle the Fed into taking draconian actions, the rising costs will cut corporate results starting in the second half of the year, analysts say.
The signs of an economic shift are sprouting all over the landscape. In the credit market, interest rates surged to a 2-year high on Friday. The Commodity Research Bureau index recently hit 23-year highs. Oil hit all-time highs repeatedly in recent weeks and is still almost 50 percent above the start of the year. And the government Thursday reported a 4.6 percent rise in hourly compensation -- one of the strongest signs yet that labor costs are rising.
"The encouraging thing is that the economic rebound is in place," said Joseph Kalinowski, director of research at Puglisi and Co. "Just two months ago we were in a jobless recovery and deflation. But now that the jobs have arrived, we're going to see more competitive wages. And more inflation pressure."
The wage inflation pressures, at least, will probably remain modest, analysts say. In part, that's because jobs can easily migrate offshore. It's also because companies are loathe to add employees with health costs soaring and terror attacks still a threat, said Richard Yamarone, director of research at Argus Research.
Indeed, while the government was reporting an expansion of 248,000 jobs last month, appliance giant Maytag (NYSE:MYG - news) was laying off 20 percent of its salaried work force, and technology mainstay Seagate (NYSE:STX - news) was trimming 7 percent of all staff.
"We continue to hear a number of corporate chieftains pushing back their hiring intentions until some of the dust from the Middle East, the war with Iraq (news - web sites) and terror-related turmoil subsides," said Yamarone.
CORPORATE PROFITS SQUEEZED
The economy's sluggish pockets will probably keep the Fed from getting overly aggressive when it meets at the end of the month. Most analysts are looking for the central bank to launch a series of one-quarter point rate increases in a gradual tightening.
But rate hikes are probably not the biggest immediate threat to the stock market rally. Instead, it's the withering impact of thousands of small cost hikes that will become Wall Street's villain. Corporate profits will be increasingly squeezed by rising costs, which will also lead to sagging demand from sticker-shocked consumers, analysts say.
"People are updating their models and the consensus will start to reflect a slowdown," said Kalinowski. "You're going to see the massive number of positive earnings pre-announcements subside. Things will start to turn negative."
The summer will probably continue to be a relatively robust period, Kalinowksi said. Good news will continue to flow with the second-quarter results -- due out in July. But starting in the third-quarter results period at summer's end, things will get stickier. The bad news could start to arrive as early as August, when companies start giving bearish forecasts for their third-quarter results, he added.
"We're going to see earnings trail off," agreed Wall. "With the tightening in the job market, wages and salaries will go up enough to impact corporate profit, but not until the third quarter, because there's always a bit of a lag before it shows up in corporate results."
After the hot summer, things could be set to cool down.
For the week, the Nasdaq Composite Index (^IXIC - news) slipped 0.41 percent to 1,979, while the Dow Jones Industrial Average (^DJI - news) rose 0.54 percent to 10,243 and the Standard & Poor's 500 index (^SPX - news) added 0.16 percent to 1,123.
Sat Jun 5, 1:21 PM ET Add Business - Reuters to My Yahoo!
By Dick Satran
NEW YORK (Reuters) - A not-too-hot and not-too-cold economic story has warmed the hearts of Wall Street investors for months.
Stocks rose Friday after the release of a long-awaited jobs report that showed an economy that still isn't growing fast enough to require drastic tightening by Alan Greenspan (news - web sites)'s Federal Reserve (news - web sites).
But Wall Street's Goldilocks tale might need a bit of revising soon, and maybe Britney Spears could take the starring role. Like Spears, who was asked by the Chinese government not to dress too hot on her concert tour there next year, investors may want to turn down the heat.
"There's going to be earnings disappointments coming by the third quarter," said Peter Wall, chief investment strategist for Chase Personal Financial Services. "We don't think the forecasts that are out there reflect the changes in the economy."
INFLATIONARY PRESSURES
As corporate hiring continues to surge, wage demands could add to the inflationary pressures already presented by rising oil and commodity prices. Even if that doesn't rattle the Fed into taking draconian actions, the rising costs will cut corporate results starting in the second half of the year, analysts say.
The signs of an economic shift are sprouting all over the landscape. In the credit market, interest rates surged to a 2-year high on Friday. The Commodity Research Bureau index recently hit 23-year highs. Oil hit all-time highs repeatedly in recent weeks and is still almost 50 percent above the start of the year. And the government Thursday reported a 4.6 percent rise in hourly compensation -- one of the strongest signs yet that labor costs are rising.
"The encouraging thing is that the economic rebound is in place," said Joseph Kalinowski, director of research at Puglisi and Co. "Just two months ago we were in a jobless recovery and deflation. But now that the jobs have arrived, we're going to see more competitive wages. And more inflation pressure."
The wage inflation pressures, at least, will probably remain modest, analysts say. In part, that's because jobs can easily migrate offshore. It's also because companies are loathe to add employees with health costs soaring and terror attacks still a threat, said Richard Yamarone, director of research at Argus Research.
Indeed, while the government was reporting an expansion of 248,000 jobs last month, appliance giant Maytag (NYSE:MYG - news) was laying off 20 percent of its salaried work force, and technology mainstay Seagate (NYSE:STX - news) was trimming 7 percent of all staff.
"We continue to hear a number of corporate chieftains pushing back their hiring intentions until some of the dust from the Middle East, the war with Iraq (news - web sites) and terror-related turmoil subsides," said Yamarone.
CORPORATE PROFITS SQUEEZED
The economy's sluggish pockets will probably keep the Fed from getting overly aggressive when it meets at the end of the month. Most analysts are looking for the central bank to launch a series of one-quarter point rate increases in a gradual tightening.
But rate hikes are probably not the biggest immediate threat to the stock market rally. Instead, it's the withering impact of thousands of small cost hikes that will become Wall Street's villain. Corporate profits will be increasingly squeezed by rising costs, which will also lead to sagging demand from sticker-shocked consumers, analysts say.
"People are updating their models and the consensus will start to reflect a slowdown," said Kalinowski. "You're going to see the massive number of positive earnings pre-announcements subside. Things will start to turn negative."
The summer will probably continue to be a relatively robust period, Kalinowksi said. Good news will continue to flow with the second-quarter results -- due out in July. But starting in the third-quarter results period at summer's end, things will get stickier. The bad news could start to arrive as early as August, when companies start giving bearish forecasts for their third-quarter results, he added.
"We're going to see earnings trail off," agreed Wall. "With the tightening in the job market, wages and salaries will go up enough to impact corporate profit, but not until the third quarter, because there's always a bit of a lag before it shows up in corporate results."
After the hot summer, things could be set to cool down.
For the week, the Nasdaq Composite Index (^IXIC - news) slipped 0.41 percent to 1,979, while the Dow Jones Industrial Average (^DJI - news) rose 0.54 percent to 10,243 and the Standard & Poor's 500 index (^SPX - news) added 0.16 percent to 1,123.