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Wall Street eyeing Fed meeting closely, but stock movements could be small

SHARE Wall Street eyeing Fed meeting closely, but stock movements could be small

NEW YORK — One and done.

That's been Wall Street's mantra over the past few weeks as it anticipates the Federal Reserve's latest interest rate hike, expected Tuesday. One more hike, and the central bank is done. But the effect on stocks after this decision could be less exciting than many expect.

While stocks have been volatile this month, much of the past week's gains were fueled not only by strong earnings, but also by investors' belief in the one-and-done theory. And there's strong evidence that Wall Street's interest rate prognosticators could be right.

The economy is definitely slowing — fourth-quarter gross domestic product rose just 1.1 percent in the fourth quarter, very slow by most standards. Job growth has likewise lagged in recent months, and high energy prices still weigh on consumers.

So if the Fed raises interest rates too much, consumers with variable-rate loans — credit cards, for example — will pay more, and have less to spend. And businesses, faced with lower consumer revenues, will also pay more to borrow money.

The Fed is still widely expected to raise the nation's benchmark interest rate by a quarter percentage point to 4.5 percent. But it's also expected to signal that its rate hikes are near, or at, an end.

Yet anyone expecting stocks to jump on Tuesday when the Fed makes its announcement will likely be disappointed, as Wall Street's reaction is already "baked in" to the price of stocks. And there's always the chance that the Fed could go for one more rate hike after Tuesday, a move that would likely pressure stocks for the rest of the week.

Last week, earnings and anticipation over an end to rate hikes combined to lift stocks out of the prior week's mire. For the week, the Dow Jones industrial average climbed 2.25 percent, the Standard & Poor's 500 rose 1.76 percent and the Nasdaq composite index gained 2.52 percent.

Economic data

Should the Fed decide to stop raising rates, investors must still contend with a slow economy, which could translate into slower corporate profits. So while the Fed's decision will set the tone for the week's trading, there are a number of economic reports that could move stocks.

On Friday, the Labor Department will release its monthly job creation report, a release that disappointed investors earlier this month. For January, the economy is expected to have created 245,000 jobs, up from December's tepid 108,000.

The Institute for Supply Management will release its manufacturing index on Wednesday. The index, a measure of industrial growth, is expected to dip slightly to 55 for January from a reading of 55.6 in December.

Earnings

With less than half the S&P 500 companies having reported fourth-quarter earnings to date, the week ahead will see several dozen notable companies reporting results. Arguably, the most closely watched will be Google Inc.

After rival Yahoo Inc.'s results fell short of Wall Street's somewhat lofty expectations, Google will have to readily beat forecasts to avoid a selloff. The company is expected to earn $1.78 per share, up from 92 cents per share a year ago. Of course Google stock has advanced mightily over the past year and closed Friday at $433.49, nearly 2 1/2 times its 52-week low of $172.52 set on March 14.

With oil prices more than $67 per barrel, investors also have been monitoring the energy sector to see if there's another opportunity for a run-up in oil stocks this year. Dow component Exxon Mobil Corp. reaped the benefits of last year's record oil prices with record revenues, and saw its stock price climb 19.4 percent from its 52-week low of $51.35 on Jan. 31, 2005, to close Friday at $61.29.

Events

The Fed's decision on interest rates is customarily released at 2:15 p.m. Eastern time. Expect the markets to gyrate somewhat Tuesday afternoon as traders attempt to anticipate the overall market's reaction. The market tends to settle down and pick a direction within about a half-hour of the announcement.