Stocks Finish Mixed

Investors turned cautious as Wednesday's Fed decision loomed. The market eyed high-profile deals involving Ford and Wrigley

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Major U.S. stock indexes closed mixed Monday as investors turned cautious ahead of the Federal Reserve's two-day policy meeting starting Tuesday. Many expect the meeting to wrap up with the Fed cutting rates one more time, but then putting its easing cycle on hold.

Investors also weighed mixed earnings reports and deal news involving two high-profile companies -- Ford Motor (F) and Wrigley (WWY).

Bonds rose. The dollar index fell. Gold and crude oil futures finished firmer.

On Monday, the Dow Jones industrial average fell 20.11 points, or 0.16%, to finish at 12,871.75. The broader S&P 500 declined 1.47 points, or 0.11%, to close at 1,396.37. The tech-heavy Nasdaq composite index added 1.47 points, or 0.06%, to end the session at 2,424.40.

On the New York Stock Exchange, 18 stocks advanced in price for every 13 that declined. The ratio on the Nasdaq was 15-13 positive.

Financial sector stocks were down Monday. A Reuters dispatch says Morgan Stanley analyst Betsy Graseck believes U.S. banks' earnings may fall 26% or $17 billion this year and a further 15% or $13 billion in 2009 as credit continues to deteriorate and trim profits. She said lenders will probably cut dividends and raise capital to offset the losses. "We are only in the 3rd inning of the credit cycle and expect it will be worse than 1990-91," Graseck wrote.

Morgan said investors should "underweight" banks with greater exposure to mortgages -- Wells Fargo (WFC) and Wachovia (WB). -- and those that operate in harder hit sections of the United States -- Fifth Third Bancorp (FITB) and KeyCorp (KEY).

Morgan also called for underweighting Citigroup (C)., citing its exposure to risky assets relative to common equity. Morgan's top "long" picks have less credit sensitivity or better capital structures: Bank of New York (BNY), JPMorgan Chase (JPM), and PNC Financial (PNC).

The market's tone has improved in recent days. "A few months ago many feared the credit crunch would put an end to the financial system as we know it, and knock the world into recession. But those fears have not been borne out," writes Action Economics economist Kim Rupert. "Indeed, it now looks as though it's Fed rate cuts that are nearing an end, while there's increased optimism that the dollar and stocks have hit bottom."

"In our opinion, the combination of some extension of the advances for uptrending cyclically sensitive issues and rebounding previously out-of-favor financials and consumer discretionary stocks should buoy the averages," writes Miller Tabak strategist Phil Roth.

There were no significant economic reports scheduled for release Monday. Friday's nonfarm payroll report for April is expected to show a 50,000 decrease. The advance fist-quarter gross domestic product report on Wednesday will likely post a 0.5% rise, helped by inventory strength. A much weaker than expected figure could increase recession concerns and the likelihood of further Fed cuts.

But the main focus this week will be on the Fed. “Although some may push [the FOMC] to stand pat, we continue to think that the most likely outcome, by a fair margin, is a 25bp rate cut coupled with a statement indicating an inclination to pause for a while unless conditions worsen,” writes Goldman Sachs economist Jan Hatzius.

June NYMEX crude oil futures last traded up 25 cents per barrel at $118.77, reports Action Economics, after ranging between $118.16 and $119.23 durinmg the New York session.