The N.Y.Times this morning! Shuttle's Effect on Economy May Be Small
By JONATHAN FUERBRINGER
The destruction of the space shuttle Columbia, which filled the airways and newspapers all weekend, adds to the list of bad news investors have absorbed recently, including the threat of a war with Iraq, a nuclear standoff with North Korea, declining consumer confidence and slowing corporate earnings growth.
Advertisement
But unlike the other events, it does not appear that the shuttle tragedy should have a significant impact on consumer confidence or on financial markets, several analysts said yesterday. One reason is that the destruction of the shuttle has not been linked to anything, like terrorism, that would point to increased risk in the future.
Even before the latest round of bad news, several strategists and economists argued that investors should effectively ignore the possibility of a war with Iraq in their investment decisions, although they agreed that the war threat has been a drag on the economy and the stock market.
Instead, they said, investors should concentrate on the economy and if they thought a rebound was likely this year, then it was a good time to buy stocks. Some analysts even said that the start of a war with Iraq would give the stock market a lift, as the fighting could end the uncertainty of what will happen and when.
"The only way this has an effect, to my view, is if it is tied into terrorism," James W. Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said yesterday, speaking of the shuttle's breakup as it re-entered the atmosphere on Saturday morning.
Douglas R. Cliggott, president of B& P Research, said, "It is clearly a huge personal tragedy for the seven families involved, but in terms of trying to map it into confidence and spending, I don't think it is going to register very high."
That does not mean that stocks of companies involved in the shuttle program will not fall as investors worry about what caused the breakup of the shuttle. But, analysts said, it will probably take a more direct link to a faulty part for a company's stock to face major selling.
Boeing and Lockheed Martin, through an equal equity stake in United Space Alliance, are the main contractors for the shuttle program. There are more than 120 subcontractors, including Honeywell and Alliant Techsystems.
As for the overall stock market, it is already under pressure from the other bad news. The economy all but ground to a halt in the fourth quarter, when the gross domestic product inched up just 0.7 percent. Consumer confidence fell in January and is not far above the nine-year low it hit in October. And after a nice rally in the first trading days of the year that pushed the Dow Jones industrial average up 6 percent, all three main market gauges are now down for the year, with the Dow off 3.5 percent and the Nasdaq composite index is down 1.1 percent.
"What is going to continue to weigh on the market is the poor fundamentals," said Jeffrey Applegate, an independent market strategist.
In January 1986, when the shuttle Challenger exploded on takeoff, the stock market was in the midst of a long rally that ended only with the 1987 crash. On the day of the Challenger explosion, the Dow Jones industrial average rose 1.2 percent while some stocks of companies linked to the shuttle program, including Morton Thiokol, which was the contractor that made the booster for the shuttle, fell sharply.
The analysts who say a war with Iraq should not diminish investors' focus on the stock market are not advising a headlong rush into equities. But they say stocks will be attractive if the economy revs up to a 3 percent pace in the first half of the year and a little higher in the second half.
Nor do analysts seem to favor so-called war plays, in part because they have been bought and sold already. Military and aerospace stocks are down 26 percent from the end of June, based on the Philadelphia Stock Exchange Defense Index, and did not get a significant lift last week after reports that President Bush would ask for a one-third increase in his military budget over the next six years.
"What investors should keep their eyes on is whether the economy gets traction," said Mr. Paulsen, of Wells Capital Management. "It's the economy that will determine the performance of the stock market this year. The war won't be there at the end of the year. The war will fade." His firm is recommending an asset allocation of 75 percent in stocks.
He predicts that the economy is going to grow steadily because it now getting a push from lower interest rates, increased government spending and a weaker dollar, which helps American exporters. Robert J. Barbera, chief economist at ITG/Hoenig, said, "If you have a long-term outlook, you are supposed to wager that the world works out O.K." But in the current environment, he said, "there is no appetite for risk and there is a ghoulish fascination with the myriad of things that could go wrong."
The current aversion to risk combined with taking a long-term view, he said, makes "this is a good time to buy stocks." He said he was "much more aggressive" in his investments right now.
Besides playing down the threat of a war on investor decisions, analysts argue that there are not many other alternatives this year, outside stocks, that offer a chance of acceptable returns.
Interest rates are so low that money market funds barely pay 1 percent. Bond market rates are higher, but if the economy does pick up speed and Congress and the White House can approve plans to stimulate the economy, interest rates will move higher, cutting into the returns from bonds as their prices fall.
Other havens, like gold, which hit a six-year high of $370 an ounce on Jan. 28, could fall once the uncertainty about the war with Iraq passed. That decline would pull down the price of gold company stocks, which as a group have jumped 25 percent since December.
While a threat of war should not divert investors from stocks, analysts still said that investors have to be prepared for all eventualities. "Investors more than ever should expect the unexpected," said Frederick B. Taylor, chief investment officer at the United States Trust Company.
This means that investors need to be more diversified than usual and more careful in their selections of stocks, he said. "I want companies," Mr. Taylor said, "where managements are able to adjust to uncertainties in uncertain times."
Mr. Cliggott, of B& P Research, put it this way: "An investor should still be extremely cautious. But not so much because of the uncertainty of the military and political situations. But because we have many months ahead of us of disappointing economic growth and disappointing earnings growth." |
