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New York: Fears of a looming recession could batter US stocks this week as investors weigh a dim earnings outlook for 2008 against a view that holds shares are cheap as seen by Microsoft's $44.6 billion bid for Yahoo.
US employers cut payrolls in January for the first time in four and a half years, the government said on Friday, another sign the US economy is teetering on the brink of recession.
"The main sword of Damocles hanging over the market is the probability that we are either in or slip into recession," said Al Goldman, chief market strategist at A.G. Edwards in St. Louis.
"My sense is that the market is going to go lower, that we're going to retest the lows of last week... and eventually I think we're going to break them," he said.
The broad Standard & Poor's 500 Index slumped to 17-month lows on January 23 and then bounced back some, but investors have not fully taken into account the fact that profit growth could decline five per cent this year, Goldman said.
Stocks rose in volatile trade on Friday on optimism over stock valuations after Microsoft's takeover offer for Internet company Yahoo. The bid is a 62 per cent premium over Yahoo's share price on Nasdaq before the deal was announced.
The Dow Jones industrial average rose 0.73 per cent to 12,743.19 on Friday. The Standard & Poor's 500 Index gained 1.22 per cent at 1,395.42 and the Nasdaq Composite Index added 0.98 per cent to 2,413.36.
For the week, the Dow rose 4.4 per cent and the S&P 4.9 per cent, marking the best performance for the two benchmark indexes since 2003. The Nasdaq rose 3.8 per cent, its biggest weekly gain in nearly 18 months.
"There's a tug of war between the bad jobs report, the disappointing upcoming outlook and what these companies are worth," said Manny Weintraub, managing director, Integre Advisors.
Among companies scheduled to report earnings this week are News Corp tomorrow and Tyco International and Walt Disney on Tuesday. On Wednesday, Aetna, Biogen Idec and Cisco Systems are set to report.
Eyes on Cisco
Investors will be looking for Cisco to give them a reading on the health of the economy and technology spending by companies this year. Cisco spooked US markets last quarter when it said it saw a dramatic decrease in orders from US banks.
But the economic data may not mean as much now that a steep slowdown has been priced into stocks and the Federal Reserve has aggressively cut interest rates, said Jeffrey Kleintop, chief market strategist at LPL Financial Services in Boston.
With results for the fourth quarter of 2007 more than halfway over, "earnings outside of financials have held up well and guidance has generally been in line" with expectations, Kleintop said.
To be sure, the profit outlook is dimmer than what analysts expected four months ago and that low threshold is leading some investors to wade into battered names.
"Some of the areas that have been heavily hit like retail and financials may prove to do very well because they've been knock-ed down dramatically," said Kelli Hill, portfolio manager at Ashfield Capital Partners
"What the market would feel comfortable with is flat earnings. We've been in a earnings recession. That's where you can find your opportunities," Hill said.
Tomorrow, the Commerce Department is expected to report new orders for non-durable goods at US factories rose 2.5 per cent in December, up from 1.5 per cent in November.
On Tuesday, the Institute for Supply Management is due to release its non-manufacturing index for January. Economists forecast a reading of 53, down slightly from 54.4 in December.
Jobs will be the focus on Thursday, when a filing by US workers seeking jobless aid for the first time will be released. Economists expect benefits claims to fall to 345,000 from 375,000 the week before.
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