February 18, 2001 Market Watch: A Questionable Crutch for a Limping Economy, by Gretchen Morgenson, New York Times
Have investors lost faith in Alan Greenspan's magic?
In early January, when Mr. Greenspan cut interest rates by one-half of a percentage point, stocks roared as investors exuded confidence that the market could indeed be saved. And when the Federal Reserve Board cut rates once more at the end of last month, strategists said again that the market was poised for recovery.
Now, however, investors aren't so sure. The Nasdaq, which has taken the brunt of the beating from fearful investors, lost 5 percent of its value on Friday and is down 1.8 percent for the year. The Dow Jones industrial average is flat so far in 2001.
A month or so ago, investors seemed certain that any economic slowdown would be quick and relatively painless. They argued that earnings weakness would pass and that share prices would rebound.
No longer. A steady drumbeat of dreary earnings reports from technology stocks — Dell Computer and Nortel Networks most recently — have investors concerned that the hangover from the bull-market party may last much longer than they previously thought.
That is a reasonable view, said James Paulsen, chief investment officer at Wells Capital Management in Minneapolis. He compared the economy today to that of 1990, the last time the United States endured a recession. That downturn ended quickly, in 1991. But while the Federal Reserve chopped the federal funds rate from 9 percent in 1990 to 3 percent by 1993, it wasn't until 1994 that the economy got out of a sluggish growth mood.
What worries Mr. Paulsen today is the possibility that the Fed's rate cuts may not be able to rouse technology spending. "If the tech sector is driven more by new-product introductions, whether the Fed lowers or raises interest rates may have no impact," he said. "That was O.K. when tech was contributing 5 percent or less to economic growth. Now it's one-third of the growth rate and it becomes critically important."
Indeed, Mr. Paulsen thinks that the United States has avoided two recessions in recent years solely because of the economic growth provided by new technologies that won the hearts of corporations and consumers. One near miss occurred in 1995 after the Mexican peso devaluation; then, sales of personal computers bailed out the country. Later, in 1998, when the rest of the world was in turmoil, buying into the Internet boom helped the nation avert the crisis.
"Even though we think the Asian crisis ended in 1999," Mr. Paulsen said, "signs that we hadn't really exited the crisis remained." Among them are excessive stock market volatility; depressed commodity prices, other than those that are energy-related; continued corporate layoffs; and persistently wide corporate bond spreads. "Maybe all those things indicated that most of the world didn't get out of economic crisis, but it was masked by the boom in technology," Mr. Paulsen said.
This picture has troubling implications for corporate earnings in 2001. "Normally, we go into a recession after a period where pricing power has been strong," Mr. Paulsen said. Not this time. On Friday, the report producer prices showed that raw goods, excluding food and energy, actually fell in price by 7.4 percent, year over year. While energy prices have spiked, companies cannot pass along the price increases. "This will put a unique pressure on profits," Mr. Paulsen said. "It's a tough place to be."
nytimes.com |
