Uncertainty Rattles the Market
By Joseph Lisanti, Editor, The Outlook
Although the economy and corporate earnings look strong,
the international situation is giving stocks the jitters.
The stock market dislikes uncertainty. Traders tend to head for the exits whenever the future seems murkier than usual. That can make for choppiness, but sometimes it provides an attractive entry point for long-term investors.
On the surface, things don't look all that uncertain on Wall Street. With the majority of companies in the S&P 500 having already reported their latest quarterly results,
Standard & Poor's analysts now expect the index's first-quarter operating earnings to be 23% higher than in the same period a year ago. For the full year, we believe operating earnings on the "500" are on track to surpass their previous peak of 56.13, set in 2000, by about 15%.
The economic recovery no longer appears uncertain. Although real gross domestic product rose 4.2% in the first quarter, below our estimate of a 4.8% gain, that was better than GDP growth in all but the third quarter of 2003. The employment picture is looking better, too. In the week ended April 24, initial claims for unemployment insurance fell by 18,000 to 338,000. That was below the consensus expectation of 345,000 new unemployment claims.
Of course, a better economy makes a short-term interest rate increase before the end of summer look to us like a sure thing. Even though that has all the earmarks of certainty, the market doesn't like higher rates.
But it is the uncertainty of the Iraq situation that appears to have jolted stock investors in recent days. In April 2004, the U.S. suffered more combat troop deaths than in the six weeks between the start of hostilities and the May 1, 2003 assertion that major combat operations had ended.
The next big date on the Iraq calendar is June 30, when that country is scheduled to regain sovereignty. Will the fighting subside by then? And who will govern Iraq on July 1?
So far, there are no answers. And the stock market dislikes uncertainty.
