An unforgettable quarter,, Market now faced with uncertainty
By Julie Rannazzisi, CBS.MarketWatch.com
Last Update: 5:40 AM ET Sept. 29, 2001
NEW YORK (CBS.MW) -- It's the quarter no one will forget.
Forever etched in everyone's memory will be the Sept. 11 terrorist attacks that leveled New York City's World Trade Center and wreaked havoc in the Pentagon.
The fourth-quarter begins with a mountain of uncertainty affecting both the economic and political realm. The repercussions of the terrorist attacks are already being felt by companies: Tens of thousands of layoffs have been announced in the airline industry; the insurance sector is hamstrung by an avalanche of claims; strings of profit warnings were announced as an already weak economy may now tip into recession.
With the final stretch of the year to begin on Monday, investors leave behind a dismal third-quarter performance: The Dow Jones Industrial Average fell 15.7 percent, its worst quarterly outing since the fourth quarter of 1987; the Nasdaq lost a crushing 30.7 percent in its worst showing since the fourth quarter of 2000 when it fell almost 33 percent; and the S&P 500 declined 15 percent. Both the Dow and the Nasdaq are now hovering close to three-year lows.
Underscoring the pain that Wall Street has felt, almost 95 percent of mutual funds are struggling with losses in 2001. See full story.
And using the Wilshire 5000 Index as a gauge of the broad market, a total of about $1.14 trillion in market value was lost in September while $2.25 trillion was lost in the third quarter.
"Obviously it was a horrendous quarter. Things were already bad before the terrorist attacks and now they are horrible. I can't make the case for the fourth quarter to be anything other than gloomy number after gloomy number. Bu we've already seen a lot of inventory liquidation and when demand returns, companies will need to restock -- fast," said Joe Liro, equity strategist at Stone & McCarthy Research Associates. He expects a shallow recession to be followed by a strong recovery.
Investors need to watch how stocks react to news, Liro maintained. When they stop going down on bad news, that'll mark the turn.
No simple solution
Fighting an unseen enemy precludes a quick, simple response to the horrific actions against the U.S. The most pressing questions are what a protracted conflict will do to consumer confidence and how it'll affect spending patterns.
"We maintain a cautious stance due to the uncertainty [surrounding the market.] Military policy is now a key ingredient in determining the stock market's direction," said Jeffrey Kleintop, chief investment strategist at PNC Advisors. "The breadth and length of the campaign will determine the market's [reaction]."
Kleintop said that while the stock averages may not go any lower this year, he doesn't see many catalysts for a sustainable upside push over the short term. He added that investors will have to contend with lots of volatility.
"As we make progress and continue to do the right things to defeat terrorism, I think confidence will be restored. And the Fed will keep proving ample liquidity to keep the economy going," remarked Robert Harrington, managing director and head of listed stock trading at UBS Warburg.
Joel Naroff, chief economist at Naroff Economic Advisors, said massive monetary stimulus, incredibly large increases in government expenditures and a cutback in imports should soften a consumption blow.
Naroff also feels that if consumers don't stay depressed during the last three months of the year, a decline in GDP -- if there is one -- may not be that big. And he's not ruling out an increase in growth.
But some economists now believe the U.S. is officially in recession.
Merrill Lynch's Bruce Steinberg expects third- and fourth-quarter gross domestic product to decline by about 1 percent. And Morgan Stanley's chief economist Stephen Roach said this week that he feels Japan and the U.S. are now in "outright recessions," and expects Europe to follow suit, trimming his global economic growth estimate for 2001 to 1.8 percent from 2.1 percent and for 2002 to 2.1 percent from 3.4 percent.
Still, many strategists held out belief that the market is now oversold, with many sectors undervalued, and thus increased their equity weightings.
Noted bull Abby Joseph Cohen of Goldman Sachs recently raised her recommended equity weighing in the firm's model portfolio to 75 percent from 70 percent, telling investors that it's "time to buy stocks." And A.G. Edwards' Mark Keller upped his equity allocation to 80 percent from 70 percent this week on belief that equity valuations are now cheap in most sectors and that stock prices already appear to have discounted a deep recession.
After being closed for four trading days following the attacks and succumbing to harrowing losses the following week -- the worst since the Great Depression -- stocks found some stability this week, albeit a tenuous one. The Dow rose 7.4 percent, the Nasdaq 5.3 percent and the S&P 7.8 percent.
"The climactic part of the move appears to be behind us. But now the rebuilding process is starting and it promises to be a long one after the huge decline that so many stocks have seen," observed Robert Dickey, technical strategist at Dain Rauscher.
Volatility -- and October -- ahead
Investors often enter the month of October with jitters, recalling that the market crashes of 1929 and 1987 occurred in that month.
But those fears are somewhat misplaced.
"October tends to get a bad reputation but they are seldom worse than Septembers," Liro maintained.
In fact, September is the market's worst performing month of the year and October ranks only seventh, according to the Stock Traders Almanac.
Yale Hirsch, editor of the Almanac, said October is a time when most bear markets seem to end, as in 1946, 1957, 1960, 1966, 1974, 1987, 1990 and 1998.
Further, November and December tend to be very positive months for the Dow, Nasdaq and S&P 500.
Can the Fed work some wonders?
Investors are readying for another Fed rate cut as the Federal Open Market Committee meets Tuesday to decide the level of the overnight lending rate. Read Economic Preview.
The fed funds futures markets are pricing in expectations for a rate cut of 50 basis points, which would take the overnight lending rate to 2.50 percent following Sept. 17's 1/2 percentage point slash. It would also mark the central bank's ninth rate cut of the year.
But Tony Crescenzi, chief bond market strategist at Miller Tabak & Co., observes that recent comments from Fed Chair Alan Greenspan seemed to hint at a desire to go slow and wait to see the impact of the terrorist attacks before deciding the remedy.
The strategist said cutting rates by a more mild 25 basis points would leave the central bank with more ammunition for later, if it's needed.
"There's only so much Fed rate cuts can do in this situation. It won't put people back on planes," Crescenzi remarked.
Kleintop said it's a toss-up between 25 and 50 basis points.
"The Fed will clearly remain in easing mode but there's already so much stimulus in the pike. They may take a wait-and-see approach and just cut by 25 basis points," he contends.
Earnings and data watch
Among the few companies reporting next week are: Walgreen, Family Dollar Stores, Tenet Health Care, Alcoa, Nautica and Marriott.
Thomson Financial/First Call notes that even with the analyst delays in submitting estimate changes following the Sept. 11 attacks and a void of information on consumer spending patterns, earnings expectations came down rapidly last week.
In fact, expected third-quarter earnings growth for S&P 500 companies dropped to a 19.4 percent decline from the previously projected 16.1 percent decline. At the time of the attacks, the estimate was for a 14.7 percent drop. And First Call said it seems likely that the estimates will be reduced several percentage points by the time the reporting season beings in earnest.
First Call notes that warnings for the third quarter continue to be close to the record-setting pace of the first quarter.
Meanwhile, the expected earnings decline for the fourth-quarter fell last week to 7.7 percent from 4.3 percent. For the first quarter of 2002, earnings for S&P 500 companies are now expected to rise 3.9 percent vs. the 7.5 percent gain that had been forecast in the previous week.
Next week's economic calendar will see a cluster of key releases, including the September National Association of Purchasing Management Index and the September employment report. Also on tap: August construction spending, August personal income and spending, August factory orders and the August consumer credit figures. Check economic calendar and forecasts.
Kelintop said the NAPM number will be closely watched to gauge the fallout in manufacturing activity following the Sept. 11 attacks on the U.S.
"It'll be critical to see how deep the retrenchment was," he said.
Kleintop expects the jobless rate to edge up to 5 percent from 4.9 percent. "I don't expect another big jump in the unemployment rate after last month's [spike]. I think the rate will hang around the 5-percent level."
Friday's trading activity
Stocks ended the final trading day of the quarter on a very solid note, ending at the highs of the session Friday in an extremely broad-based advance.
All sectors ended deep in the plus column, led by chip, Internet, airline, oil service, financial, natural gas, utility and cyclical issues. And many tech names that struggled significantly on Thursday got a nice push higher: Cisco Systems climbed 8.4 percent, JDS Uniphase 4.8 percent and Sun Microsystems 4.6 percent. Check market stats and latest sector performance.
Many market watchers attributed the positive action to quarter-end portfolio readjustments and a bounce from oversold conditions.
The Dow Jones Industrial Average ($INDU: news, chart, profile) surged 166.14 points, or 1.9 percent, to 8,847.56. Topping the Dow's list of gainers were shares of American Express, Walt Disney, Honeywell, General Motors, DuPont and General Electric. Only five Dow stocks ended with losses: Boeing, Philip Morris, Intel, Hewlett-Packard and Coca-Cola.
The Nasdaq Composite ($COMPQ: news, chart, profile) gained 38.09 points, or 2.6 percent, to 1,498.80 while the Nasdaq 100 Index ($NDX: news, chart, profile) added 24.10 points, or 2.1 percent, to 1,168.37.
The Standard & Poor's 500 Index ($SPX: news, chart, profile) climbed 2.2 percent while the Russell 2000 Index ($RUT: news, chart, profile) of small-capitalization stocks tacked on 3.0 percent.
Volume came in at 1.63 billion on the NYSE and at 2.11 billion on the Nasdaq Stock Market. Market breadth was markedly positive, with winners taking out losers by 25 to 7 on the NYSE and by 25 to 12 on the Nasdaq.
In the fixed-income arena, the 10-year Treasury note ended off 9/32 to yield ($TNX: news, chart, profile) 4.58 percent while the 30-year government bond climbed 7/32 to yield ($TYX: news, chart, profile) 5.42 percent. See Bond Report.
In the currency segment, the dollar gave back 0.1 percent to 119.53 yen while the euro shaved 0.7 percent to 91.12 cents.
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Saturday September 29, 10:44 am Eastern Time
Economists Look Ahead to Rebound in 2002
By Caren Bohan
WASHINGTON (Reuters) - Even though most economists say a U.S. recession is inevitable in the wake of the Sept. 11 terror attacks, many have become increasingly optimistic that when a recovery finally arrives, it will be a strong one.
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Hope about a light of the end of the tunnel for the economy helped to lift stock prices on Monday. After its worst week since the Great Depression, Wall Street bounced back, with the Dow Jones industrial average surging more than 4 percent.
There is widespread agreement that over the next six months, the economy -- which was weak well before the deadly attacks in Washington and New York -- will sink into an even deeper slump as nervous consumers shy away from vacations, trips to the shopping mall and even house-hunting.
But recessions, as painful as they are, are often followed by periods of strong growth. After months of hunkering down and bolstering their balance sheets, businesses and consumers can spend more freely and often do because of ``pent-up'' demand.
``It may seem like gloom and doom for the economy in the near future but it will clarify,'' said Victor Zarnowitz, a business-cycle expert who consults for the Conference Board in New York. ``It may be that a recession is not the ultimate disaster.''
RIPPLES SPREAD
Both Zarnowitz and Diane Swonk, chief economist at Bank One Corp. in Chicago, said that over the next few months, the economic picture will remain very uncertain as effects of the attacks ripple through all corners of the economy.
Close to 7,000 people are dead or missing after teams of people hijacked four commercial airplanes on Sept. 11. Two jets rammed into the Trade Center's twin towers, one hit the Pentagon and a fourth crashed in Pennsylvania.
``Up front, it's hard to escape what could be classified as a recession,'' Swonk said.
Economists loosely define a recession as two straight quarters of falling gross domestic product. As recently as the second quarter of this year, the economy was teetering on the brink of recession, with GDP inching up a mere 0.2 percent.
Data on the third quarter, which ends in September, won't be available until late October.
The typical economic recession in the post-World War II period has lasted 11 months. Some economists say the economy may have been in a recession as early as June or before, although others believe any contraction would have started with the terror attack.
Economists see mid-2002 as the most likely time when a recovery in the world's top economy could pick up steam.
LIQUIDITY ON THE WAY
Swonk said that despite the economic devastation, ``over the long haul, we're putting a tremendous amount of liquidity into the economy.''
Eight interest-rate cuts by the Federal Reserve will help rev up growth. And Washington has cast off its self-imposed fiscal strait-jacket. Prior to the attacks, lawmakers and the Bush administration were talking of potential budget cuts in order to avoid tapping into the politically sensitive Social Security trust fund.
However, within a few days of the hijack attacks, Congress approved a $40 billion emergency package to fund counter-terrorism and recovery efforts. With the country in shock over the attacks, lawmakers of both parties have said money was not the issue and they expected to spend more.
Swonk said business spending could also pick up, helped along by some unexpected consequences of the attack. For example, some businesses are investing in new telecommunications equipment and diversifying their information networks.
Mark Zandi, chief economist at Economy.com in West Chester, Pa. said there is a certain logic to what economists are referring to as a V-shaped scenario in which the economy contracts then rebounds strongly.
``By this time next year, the economy should be expanding and unemployment should no longer be rising and may begin to fall,'' he said.
But Zandi added that scenario assumes that any military action the United States takes will be finished by next year and that there will be no further terrorist attacks.
In addition to the risk of another attack -- which could send consumers into hiding again -- Zandi said there is the peril that, as the downturn progresses, those burdened with high debt loads get into financial trouble, potentially hurting banks and other lenders.
But so far, economists say the financial system appears to be in decent health. |
