Are the Markets Headed for a Crash?
Crash Test
As markets dip to their lowest level in years, some wonder whether the crisis in corporate confidence could trigger a far more serious downturn
By Jennifer Barrett
NEWSWEEK WEB EXCLUSIVE
July 3 — It wasn’t much of a surprise when the tech-heavy Nasdaq Composite Index—home to troubled telecom giant WorldCom—slipped after WorldCom admitted it had hidden $3.9 billion in expenses from investors. But then the Dow Jones Industrial Average, which includes bedrock blue chips like Procter & Gamble and 3M, skidded as well.
THIS WEEK, on Tuesday, the Dow broke through the psychologically significant 9,000 mark during the session. And the Standard & Poor 500 index (which contains financially troubled Tyco International) followed in step, falling to a four-year low.
“It’s all about confidence and faith in corporate profits,” says Stuart A. Schweitzer, global investment strategist for J.P. Morgan Fleming Asset Management. “What we’re seeing is individuals throwing up their hands and saying, it’s just one thing after another.”
Could the growing crisis of confidence trigger another market crash? The question gained new relevance this week. But Schweitzer and most other analysts aren’t counting on so severe a correction. They say the market may continue to slide in the short term then recover during the next several months—and, perhaps, even strengthen—as earnings improve and reforms are adopted by (or imposed upon) corporations and investor confidence returns. “The best hope for the market is for the economic picture to brighten, which we think is happening, and for corporate profits to respond accordingly,” says Schweitzer.
In many ways, the economic data is encouraging. Jobless claims are at their lowest levels in more than a year. New home sales are at a record high and orders for capital goods are rising at the fastest pace in six months. “The economy is clearly ahead of the market, which is really unusual—normally it lags behind,” says Charles Kadlec, chief investment strategist for the mutual-fund firm J. & W. Seligman & Co.
But the string of accounting scandals, along with corporate profit warnings and fears of more terrorist attacks, have made investors wary. That was especially true this week, when the normal preholiday slump was exacerbated by warnings of potential terrorist attacks over the Independence Day holiday and by profit warnings from Advanced Micro Devices and other major corporations. A slew of earnings announcements are expected next week, and the early projections are optimistic. J.P. Morgan Fleming figures second-quarter earnings among big-cap stocks will rise 5 percent compared to the same period a year ago—the first increase in nearly two years. “That has the potential to at least begin to restore hope,” says Schweitzer.
But the recent revelations from WorldCom, Xerox and, most recently, Vivendi, have made investors skittish. “The market is likely to need evidence of more than one quarter’s profiting before investors really start to get confident,” concedes Schweitzer. “Confidence takes a long time to establish, and can be broken overnight.”
Kadlec says the market is already in the process “exorcising greed.” “The public is saying they are not going to trust these companies [like WorldCom] anymore with their assets,” says Kadlec. “That self-correcting system is well underway. We are all being reminded of how important ethical conduct is in the day-to-day running of the business, and this makes markets stronger in long run.”
Brad Fay, managing director at the market-research firm RoperASW, believes the public has managed to keep the recent revelations in perspective. A survey in May, taken after the collapse of Enron and the accounting probe into Global Crossing, shows that nearly three quarters of respondents still had at least a fair amount of confidence in our business leaders. “There is still very much a desire on the public’s part to look at this as being a few bad apples,” says Fay.
Still, he concedes that even if investors have a fundamental confidence in business leaders, there’s a lot of short-term uncertainty. That is not likely enough to cause a market crash, but the possibility can’t be ruled out completely. “There’s a lot of confusion right now,” adds Fay. “We just don’t know what might happen next.”
Kadlec, who predicted in 1999 that the Dow would hit 100,000 by 2025, is hoping for the best. “I still say we are a lot closer to the end of the bear market now than we are to the beginning.”
© 2002 Newsweek, Inc.
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