After weeks of speculation, Wall Street will finally get the verdict from the Fed next week. At this point it's not a matter of if interest rates will be raised but by how much.
This week's trading could be viewed as a pre-emptive strike against the Fed as the Dow Jones industrial average fell 512 points to 10,739.81 while the Nasdaq composite shaved off 346 points to finish at 3,888.43.
"The market clearly has been momentum-driven,'' said Joseph Barthel, chief investment strategist at Fahnestock & Co. "Earnings have been better than expected and all of this I think helps, but next week the market will take a quick dose of reality when the Fed meets."
On Friday, the U.S. Commerce Department announced its advance estimate of an annualized 5.8 percent Gross Domestic Product growth rate in the fourth quarter after a 5.7 percent rate in the third quarter. Economists surveyed by Reuters predicted a 5.3 percent GDP growth rate.
The Fed's policy-setting group, the Federal Open Market Committee, which meets Tuesday and Wednesday, is widely expected to raise the federal funds rate by 25 basis points to 5.75 percent from 5.50 percent.
Wall Street, however, has been nervous for weeks that the strength of the economy will persuade the Fed to tighten by 50 basis points to cool the economic growth, which next week will become the longest expansion in U.S. history.
"The real question is whether it's going up a quarter or a half,'' said Larry Rice, the chief investment officer at Josephthal Lyon & Ross. "I think we're going to get one of those stealth corrections if (Greenspan) does half a point on Wednesday."
Technology investors got a jolt of reality this week when Dell Computer Corp. (Nasdaq: DELL) warned that its fourth-quarter sales and earnings will fall shy of analysts' estimates.
While Dell shares did retreat a bit, several analysts jumped to the PC maker's defense, essentially arguing that a projected 35 percent increase in sales in fiscal 2000 merits buying the stock at its current price.
Dell blamed an "inconsistent" flow of key semiconductor components and a slower-than-expected rebound in sales to corporate and institutional customers related to the Y2K rollover for the shortfall.
Dell said it will likely post a profit of $430 million, or 16 cents a share, on sales of $6.7 billion.
First Call consensus expected the PC maker to earn 21 cents a share in the quarter.
Looking ahead to next week, a few more significant earnings reports will trickle out, led by PeopleSoft Inc. (Nasdaq: PSFT) and Copper Mountain Networks Inc. (Nasdaq: CMNT).
PeopleSoft topped analysts' estimates in its third quarter, earning $5.2 million, or 2 cents a share, on sales of $303 million.
Analysts are expecting a profit of 2 cents a share this time around.
Its shares closed off 2 11/16 to 21 1/8 Friday.
First Call consensus expects Copper Mountain to earn 8 cents a share in its fourth quarter, matching its earnings for the third quarter.
Its shares closed off 2 to 53 3/4 Friday.