Investors knew the first three months of the year were bad for companies, but now it appears that they were downright abysmal -- and that there might be more pain to come. With the nation's banks releasing their quarterly results this week, anxiety has returned to the stock market.
Last week ended on a grim note, with the Dow Jones industrials falling 256 points Friday after General Electric Co. reported a profit decline and lowered its forecast for the year. The disappointing data from GE arrived on the heels of downbeat earnings and outlooks from companies including chip maker Advanced Micro Devices Inc. and home furnishings retailer Bed Bath & Beyond Inc.
"The biggest risk to the market is earnings," said David Chalupnik, head of equities at First American Funds, adding that profit forecasts for 2008 appeared too optimistic at this point. "We do expect April to be a volatile month. We expect earnings and guidance to be poor."
The Dow finished last week down 2.3%, the Standard & Poor's 500 index ended 2.7% lower, and the Nasdaq composite index slid 3.4%.
This week, the banks open their books. Roiled by a mortgage industry that went haywire when homeowners started defaulting on their loans, the nation's financial centers are struggling. When banks struggle, they get tight with their lending, which in turn damps the economy.
Citigroup Inc., the nation's largest bank by assets, and Merrill Lynch & Co., the world's biggest brokerage, are each believed to have suffered losses in the first quarter, although narrower than those they reported in the fourth quarter. Washington Mutual Inc., the nation's largest savings and loan, also is expected to post a loss.
Analysts predict JPMorgan Chase & Co. and Wells Fargo & Co. will report profits, but below the levels seen a year ago. Meanwhile, investors will scrutinize first-quarter results from Bear Stearns Cos. to see how wise it was for JPMorgan to buy the struggling firm.
Beyond the actual earnings from these institutions, however, investors will examine how much the banks' assets lost value in the first three months of the year and seek clues about whether those values could fall further.
"The good news is the credit markets do look to be improving a bit," Chalupnik said, pointing to the shrinking spread between the rates for high-risk and low-risk debt. "But I think it will still be rough going for the financial sector."
