US Markets face a test on Monday

Just as earnings season hits full swing next week and investors get their first full taste of how the housing meltdown affected corporate profits, Wall Street will take a moment to recall how the Dow plunged nearly 23% on a Black Monday 20 years ago.

The earnings season gets going full blast with results expected from more than 80 companies in the Standard & Poor’s 500 Index, as well as hundreds of mid-sized and smaller companies.Expectations are low, with Reuters Estimates saying S&P 500 profits are expected to grow just 3.2%.

Late summer credit market seizures as the housing sector spiraled out of control will come into focus when Citigroup and Bank of America report results, providing more clues on how the mayhem hit the financial sector.The mix includes several pharmaceutical companies such as Eli Lilly and Co, Pfizer, Wyeth and Johnson & Johnson.

Bob Millen, co-manager of The Jensen Portfolio, a Portland, Oregon-based mutual fund, said that, rather than actual earnings for the recently completed third quarter, companies’ forecasts of future profits will be more crucial.

“I think what is probably going to move the market more is how many companies lower their earnings expectations going forward,” he said. “If there are a significant number of them, I don’t think the market will treat that very kindly.”Millen said that in latest crop of earnings reports, companies deriving earnings from overseas sources will have an edge.

“Any company that is largely depending on their revenues coming exclusively from the US is subject to potential earnings warnings going forward,” he said.The Dow Jones industrial average finished the week up 0.2%, the S&P 500 rose 0.3% and the Nasdaq Composite Index gained 0.9%.

For the year so far, the blue-chip Dow average is up 13.1%, while the S&P 500 is up 10.1% and the Nasdaq is up 16.2%.Memories Of 1987 Market CrashIn addition to the blitz of numbers next week from earnings reports and economic indicators, Wall Street will face on Friday the 20th anniversary of the 1987 stock market crash. Friday’s date commemorates Black Monday, as October 19, 1987, came to be known, when the blue-chip Dow Jones industrial average fell 508 points, or 22.6%, in what is still the Dow’s biggest percentage drop.

Millen said he was working in the banking business at the time. He remembers the person who ran the trust department calling and asking what he should do.
“I said ‘take a break, don’t get too excited, keep watching it, and eventually it will go back up.’”
Millen thinks a recurrence is unlikely. The economic backdrop was very different in 1987, with higher interest rates and a recession looming then, he said.“Markets are more sophisticated today, and risk is more dispersed,” he said.

Housing picture still grim

Among the coming week’s economic data, September housing starts, due on Wednesday, will be closely watched as that industry remains mired in what many describe as a recession.In a Reuters poll of economists, the median forecast is for housing starts to slip to an annual pace of about 1.29 million units, down from 1.33 million in August.

Ed Vallar, director of investments and research at GM Advisory Group in Port Washington, New York, said the housing slump is definitely not over. He is especially concerned about the resetting of adjustable rate mortgages, which will mean bigger monthly payments for borrowers.