NEW YORK — A malaise has settled over Wall Street while investors, longing for a reason to buy stocks, are instead finding only excuses to sell: the increasingly dismal earnings outlook and renewed concerns that interest rates might actually rise instead of fall.
Add to that a presidential election nowhere near resolution, and it looks like Wall Street’s usual December rally could be in danger.
"The market is searching to find a reason to believe that the worst is behind us. And, unfortunately, that evidence is not there," said Charles White, portfolio manager at Avatar Associates.
This past week, after a disappointing third-quarter earnings season, the telecom company BellSouth and fiber-optics maker Applied Materials each warned that current quarterly results would fall short of expectations. And Merrill Lynch downgraded the entire fiber-optic industry, which had been seen as the last solid performer in the battered high-tech sector.
Investors were further shaken by the prospect of higher interest rates after the Federal Reserve’s declaration Wednesday that inflation is still a risk to the economy. That pretty much ruled out a drop in rates in the near future — just when Wall Street was getting hopeful that the central bank would relax its credit policy amid signs that the economy is slowing.
The Fed’s statement squelched the first rally on Wall Street since Election Day. Already nervous about earnings, investors feared that higher rates would further crimp corporate profits.
As these events took place, the election remained in limbo. And investors, who loathe uncertainty, found no reason to buy.
"After several disappointments this week and last week, investors are beginning to think that whatever is left of the bull market is a mere shadow of its former self," said analyst Alan Ackerman, executive vice president of Fahnestock & Co.
The stock market often rallies in December as investors look for a place for bonuses, and as institutional investors such as mutual and pension fund managers dress up their portfolios in time for annual reports.
However, if the market’s funk doesn’t end soon, investors might look for less volatile places for their bonuses. And portfolio managers might decide to be more conservative this year.
Whether there is a December rally, analysts said, will depend on a new series of earnings reports and profit warnings expected next month. Both Ackerman and White still see reason to hope.
"It’s just a question of whether companies have done a good enough job of curtailing expectations on Wall Street that we can get through the preannouncement earnings season unscathed," White said.
Without good news about interest rates, a resolved presidency or a better earnings outlook, analysts expect investors to continue to stick with what seems to be their current mantra: sell high-priced tech issues and put some money into blue chips with more predictable earnings growth.
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