Investors Have `Full Plate' of Concerns: U.S. Stocks Outlook
By Danielle Sessa
New York, Dec. 28 (Bloomberg) -- U.S. stock investors have ``a full plate of things to worry about'' as the worst December since the 1930s ends and a new year begins.
Rafael Tamargo, head of equity research at Wilmington Trust Co., provided the description. His firm manages $15 billion of stocks in Wilmington, Delaware.
``The question marks are North Korea and Iraq,'' he said. North Korea raised concern it may be building atomic bombs when it said it will expel United Nations nuclear-plant inspectors. UN weapons examiners are in Iraq, and the U.S. has threatened to disarm the country by force if necessary.
``Those are concerns that can put a damper on the market no matter what happens on the earnings front,'' Tamargo said. Rising energy prices may reduce profit at companies such as Dow Chemical Co. and slowing consumer spending may hurt retailers such as Wal- Mart Stores Inc., the world's largest merchant.
The S&P 500 and Dow average are headed toward their biggest December declines since 1931 after rallying in October and November. The S&P has lost 6.5 percent this month. In December 1931, it shed 15 percent. The Dow has dropped 6.7 percent, compared with the 17 percent plunge 71 years ago this month.
Year-End Slump
During the past week, the S&P shed 2.3 percent and the Dow slid 2.4 percent in abbreviated trading. The Nasdaq dropped 1.1 percent. Stock markets closed three hours early on Tuesday and shut Wednesday for Christmas.
The week's declines extended losses for investors. U.S. stocks have shed $2.9 trillion this year, based on a drop in the Wilshire 5000 Index, the broadest measure of the market. That's about equal to the total value of the 30 members in the Dow.
``It was demoralizing for professionals in our business,'' said Duncan Richardson, who helps oversee $55 billion as chief equity investment officer at Eaton Vance Management Inc. in Boston. ``Nobody likes losing money for shareholders.''
The S&P 500 and Dow averages are completing their first three- year losing streaks since 1939-1941. The S&P 500 is down 24 percent this year, its largest drop since 1974. The Dow average has slipped 17 percent, the most since 1977. The Nasdaq Composite Index has fallen 31 percent.
Stocks last fell four straight years in 1929-1932.
Next Week's Data
Next week, reports on economic growth in the Chicago region, home sales, vehicle sales, and manufacturing are likely to show little growth or declines, according to Bloomberg News surveys of economists. The market will be closed Wednesday, New Year's Day.
Still, investors may focus more on developments in North Korea and Iraq. United Nations weapons inspectors are searching Iraqi sites and questioning scientists to determine if the country has mass destruction. The U.S. has condemned North Korea's actions regarding nuclear plant inspectors. Defense Secretary Donald Rumsfeld said this week there is ``no doubt'' the U.S. could fight two wars at a time.
``The major catalyst over the next couple of months is a resolution to the war issue,'' said Dean Gulis, who help oversee $65 billion at Loomis, Sayles & Co. in Bloomfield Hills, Michigan. ``That is putting a damper on spending and investment decisions.''
Oil Rises, Profits Shrink
At the same time, oil prices have jumped to a two-year high as Iraqi inspections proceed and a four-week strike in Venezuela curbs shipments from the fourth- biggest supplier of crude to the U.S.
Crude oil for February delivery climbed to $32.72 in New York trading and is up more than 60 percent this year. Rising energy costs may hurt profits at companies that use oil as a raw material including Dow Chemical, the largest U.S. chemical maker.
``If oil stays up where it is, you will see some earnings pressure on the chemical companies,'' said Wilmington's Tamargo, who firm owns shares of Dow and DuPont Co. ``You could also see some lingering effects with some sluggish retail sales'' as gasoline prices increase, he said.
Corporate profit growth at S&P 500 companies, forecast to at 13 percent in the fourth quarter, may slow to 12 percent in next year's first quarter, according to the average analyst estimate complied a Thomson First Call. That's down from predictions of 20 percent and 16 percent growth on Oct. 1.
``Companies are going to be pretty cautious on their outlook,'' Gulis said. ``We are not going to get a lot of encouragement out of first-quarter earnings.''
Wal-Mart lowered its December sales forecast at stores open more than a year as consumers slowed spending during the holiday season. The world's largest retailer has said the past three Mondays that sales were at the low end of estimates for the month.
Investors expecting an accelerating economic recovery are betting that consumer spending won't collapse and business investment will increase. The economy is forecast to grow 2.8 percent next year, accelerating from 1.4 percent in the fourth quarter, according to a survey this month by the Blue Chip Economic Indicators survey.
Tamargo predicts 2003 profit growth of 10 percent and similar returns from the stock market.
``All our earnings numbers can be thrown out the window if the consumer weakens substantially, and that would make corporations are more hesitant on spending,'' he said. ``Everything revolves around earnings.''
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