Reuters story - "Perfect Storm" on Wall Street Reuters Finance News
'Perfect Storm' Playing on Wall Street
By Pierre Belec Oct 21 7:20am ET
NEW YORK (Reuters) - Now playing on Wall Street: The ''Perfect Storm''. A short or long engagement?
Investors are swimming through a sea of corporate earnings and they're looking over their shoulders, uneasy about the three weather systems that have come together.
Inflation, monetary policy and oil prices are converging at the same time, threatening to bring down Wall Street's spectacular bull market.
What's scary is that the last time all three factors were in play 10 years ago, the economy slipped into recession.
WEIRD STUFF
The dark clouds are forming just days after the Street toasted the 10th anniversary of the bull market, which started on Oct. 11, 1990.
More tasty nuggets. Over the last 50 years, the U.S. economy has slipped into recession around the turn of the decade. And, recessions have often coincided with the first term of a new president.
Investors are in shock, now that the Dow Jones industrial average is down 12 percent for the year after sliding briefly this week below 10,000 points and the Nasdaq Composite index is off 15 percent.
The worse may not be over for the market because people are talking more about the possibility that the economy might be getting slammed by a ``hard landing'' or ``recession.''
Analysts expect the economy's growth to slow as a result of the Federal Reserve's money tightening, but they won't rule out the danger of an outright recession, which would be nasty on growth and the jobless rate.
The 'Greatest Bull Market' in history has been given a lot of credit for stoking the wealth of consumers and corporations while keeping inflation low. For that reason, analysts worry about the consequences of a freefall in stocks.
What also bothers the experts is that oil prices are climbing at the same time that the U.S. economy appears to be slowing under pressure from interest-rate increases .
The inflation numbers for September showed U.S. consumer prices jumped 0.5 percent as energy prices leaped 3.8 percent. Also, wholesale prices, a measures of prices paid to the nation's factories, farms and other producers, surged 0.9 percent.
``The confluence of an oil shock and the lagged impact of monetary tightening suggest the risks of a hard landing can no longer be ignored,'' says Stephen Roach, chief economist for Morgan Stanley Dean Witter.
REPLAY OF 1990?
History may repeat itself. Oil prices soared to $41 a barrel when Iraq invaded Kuwait in 1990 but the spike in energy did more damage because it coincided with a campaign by the Fed to lift interest rates in a pre-emptive strike against inflation. The one-two punch was too much for the economy to take and it slipped into recession.
While oil jumped this fall to nearly $38, the economy is still waiting for all of the aftershocks to be felt from six interest-rate increases by the Fed because there is a lag of up to nine months from the time interest rates are boosted and the tightening does the trick of slowing things down.
By most accounts, less than half of the Fed's increases, which were launched on June 1999 and have totaled 175 basis points, have filtered through the economy. So a lot more negative forces will be felt on the economy in the months ahead.
``High energy prices are a lose-lose situation for most economies of the world. It's a tax on people's money,'' says Allen Sinai, chief global economist for Primark Decision Economics Inc.
``Even if oil prices stay where they are, the higher energy bills are the things that can cause a hard landing for the economy next year,'' he said.
The high oil prices are not expected to go away anytime soon.
Richard Leader, managing director of Burnham Asset Management in Houston, says the booming global economy has exposed the cracks in the energy picture.
``Even if OPEC could produce more oil, the world's tanker capacity has eroded so far in recent years that there are not enough ships to get it here,'' he said.
``Pipeline infrastructure to move natural gas and refined products around the U.S. has not kept up with demand,'' Leader said. ``Our refining capacity is barely adequate when it is operating at 95 percent of capacity, where there is no room for error or downtime.''
Indeed, the Organization of Petroleum Exporting Countries appears to have gotten its act together. The cartel has united to keep oil from becoming cheaper than bottled water, which was the case in December 1998 when crude crashed to a 25-year low of less than $11 a barrel.
``The energy shock is hitting the global economy when it is already moving to the downside,'' Roach said. ``It could well reinforce the cumulative forces of slowing growth that are already under way.''
Sinai sees a risk that oil will shoot up to $40 in the next 12 months.
``High oil prices have a negative impact on the stock market because they damage corporate earnings,'' he said. ``High energy prices also hamstring the central banks' ability to rescue economies through interest-rate cuts.''
GREENSPAN'S LANDSCAPE HAS CHANGED
Over the years, Federal Reserve Chairman Alan Greenspan has been able to snuff out brushfires by cutting interest rates during internal or external crises. But this time, the Fed chief may look like a deer frozen in the headlights, unable to come to the rescue of an ailing economy.
``Fed Chairman Alan Greenspan is now stuck between a rock and a hard place,'' Sinai said. ``Oil prices will put a restraint on consumer spending and the inflation kick from rising oil prices will make it more difficult for the Fed to prevent the economy from getting into trouble.''
What if the economy goes into a stall?
``The central bank would be faced with a very difficult problem because it cannot lower interest rates when inflation, even oil-related inflation, is rising,'' Sinai said. ``The Fed would have to wait until there is a deflationary effect coming from a weaker economy before it takes a shot at lowering rates.''
SINAI'S ADVICE
``The near-term prospects for stocks looks pretty dicey,'' said Sinai. ``Investors should hunker down and avoid the temptation to rush back into the market.''
But he sees tremendous bargains in the market for investors with a long-term strategy, i.e. three to five years forward.
For the week, the Dow Jones industrial average edged up 34.41 points at 10,226.59. The Nasdaq Composite index rose 166.31 to 3,483.08 and the Standard & Poor's 500 index gained 22.75 at 1,396.92. |
