Third Quarter Corporate Earnings and Possible Additional Federal Reserve Intervention Affect See-Sawing Market

While acknowledging that the U.S. market is likely to remain volatile for some time, many are of the opinion that the market’s devastating downward slide may be nearing an end. However, the U.S. economy is still in a whole heap of trouble, and this was underscored by the fact that on Monday, Federal Reserve Chairman Ben Bernanke called on Congress to consider an additional fiscal package to boost the economy. Historically, in tough times the stock market has picked up months before a noteworthy improvement was experienced in the economy – so this should come as no surprise to the financial world.

At close of trade on Tuesday 21 October the Dow Jones industrial average had dropped 2.5 percent, while the Standard & Poor’s 500 index fell by 3.1 percent and the Nasdaq composite lost 4.1 percent. This had a ripple effect into Asian markets which reflected varying degrees of losses by noon on Wednesday. European markets on Tuesday were mixed with the CAC40 in Paris gaining a mere three-quarter of a percent, while Frankfurt’s XETRA DAX and London’s FTSE 100 each lost a little over one percent.

Poor third quarter corporate earnings have also served to put a dampener on U.S. markets. For example, 21 percent of the Standard & Poor’s 500 companies have reported results reflecting that their profits have fallen by an average of 10 percent as compared to a year ago. Chemical manufacturer DuPont cited the violent hurricane season as one of the key reasons behind third quarter earnings being down 30 percent, as well as the reason for trimming fourth quarter 2008 earnings forecast. Caterpillar’s third quarter profit slipped by 6 percent with its record global sales being offset by higher raw material costs. Indicating the even in tough times, or maybe because of tough times, people still need medical treatment Pfizer narrowly beat its projections for third quarter profits. While Yahoo’s third quarter sales and earnings matched expectations of Wall Street forecasts, the company has announced that it will be cutting up to 10 percent of its workforce, being more than 1,500 employees, in an effort to reduce costs. Certainly, forecasts by corporate companies for the fourth quarter of 2008 will be under intense scrutiny by investors trying to make some sense of the currently unpredictable stock market.

On Tuesday, the Federal Reserve announced that it will begin buying commercial paper from money market mutual funds. Commercial paper is a short-term funding mechanism which is vital for the day-to-day operations of many companies. Moreover, bank-to-bank lending rates have continued to decline and this is an indication that the credit market is loosening up and credit will start becoming easier to obtain. Compared with the previous two weeks when stocks across the globe received a serious battering, investor anxiety appears to have decreased since Monday, with many hopeful that financial sector rescue measures being put into place by authorities around the world will start paying off in the near future.