By Nick Godt
Stocks will start next week riding a new wave of optimism after
the Federal Reserve took extraordinary steps to lower borrowing
costs, which helped the market score its first two back-to-back
weeks of gains of the year.
"People in the stock market are encouraged by what the Fed is
doing," said John Lonski, managing director at Moody's. "They're
doing everything they can, and now some degree of their credibility
is restored."
But with the two final sessions of the week ending lower and
with upcoming data on housing, as well as key appearances by
Treasury Secretary Timothy Geithner next week, some say the nascent
rally could still trip up against some hurdles.
"I would like for the rally to continue, but it now looks a bit
more precarious," said Robert Pavlik, chief market strategist at
Banyan Partners. Still "we have a light economic calendar, so if we
get numbers that show stabilization in housing and upbeat comments
from Geithner, that would help."
Existing-home sales data for February come out Monday, followed
by new home sales on Wednesday.
Markets will focus on Geithner's remarks to Congress, first on
the controversies surrounding the bailout of American International
Group Inc. (AIG) Tuesday and on bank regulation on Thursday.
Many also hope that he will elaborate on the Treasury's plans to
handle toxic assets, the very same which have plagued banks'
balance sheets and the financial system before bringing down the
entire global economy.
Fed gets Street cred
Over the past week, the Fed gained back some credibility on Wall
Street by announcing Wednesday a surprise move to buy up to $300
billion of Treasury bonds, as well as expanding its purchases of
mortgage-backed securities and agency debt.
"The U.S. central bank has officially cranked up the printing
presses and will be flooding the financial markets with money,"
said Kathy Lien, director of currency research at Global Forex
Trading.
The bond market surged on the news, sending Treasury yields --
which move inversely to prices -- to their biggest one-day plunge
since the stock market crash of 1987.
Treasury yields are used as benchmark for the interest rates on
many consumer loans, including for mortgages. Lower bond yields
also make Treasury bonds less attractive to investors, leading them
to seek more risk, such as turning to stocks.
After the government moves, the dollar plunged, helping boost
the price of commodities including oil and gold. and .
Stocks, for a change, reacted positively to the Fed's action.
The Dow Jones Industrial Average gained 0.7% for the week. The
broad S&P 500 Index rose 1.6% and the Nasdaq Composite Index
(RIXF) posted a weekly gain of 1.8%.
For March, the broad market, as measured by the S&P, is up
4.6%.
"[The Fed] ran into credibility issue when it ran out of ways to
lower interest rates," with the Fed's official key rates already
near zero since last year, according to Banyan's Pavlik. "But now,
they came out of the meeting with some newfound respect from the
Street."
The actual impact on the economy from the Fed's moves will be
the ultimate measure of the central bank's success, he added. In
the meantime, most data continue to paint a bleak picture for the
economy.
Besides the housing reports next week, Wednesday will bring
February data on orders for durable goods, which include some
measures of business spending. Thursday brings final figures on
fourth-quarter gross domestic production. Friday will bring reports
on consumer confidence in March, and personal income in
February.
Geithner's test
Ailing financials stocks have managed to rally through March,
helped by upbeat comments from Citigroup Inc. and Bank of America
Corp. , whose outlook has improved after receiving billions of
dollars of government money.
Financial stocks also have found support after the government
backed away from the possibility of nationalizing some of the
biggest ailing banks -- something that would have wiped out their
shareholders.
But Wall Street has remained uneasy with the toxic assets linked
to bad home loans still sitting on banks' balance sheets. Some hope
Congress will change accounting rules -- so-called mark-to-market
rules -- to allow banks to revalue their assets above what the
market might assign them.
The Treasury, for its part, launched a program to try and incite
private investors to partner with the government in assigning
values to the assets and find them buyers.
"But so far, the feeling is that the question of toxic assets
hasn't been addressed, and that attracting private capital will be
a problem," said Pavlik.
After the Fed's big move last week, the Street will now turn to
the Treasury and Geithner to provide more answers.