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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: StanX Long who wrote (55074)	11/5/2001 1:23:10 AM
From: StanX Long	Read Replies (2) \| Respond to of 70976

Stocks View: Investors Feel the Heat By Pierre Belec NEW YORK (Reuters) - The Teflon is wearing thin on the U.S. economy and it's finally time to stick a fork in the record expansion: It's done. Stock market investors got the official word this week as the economy posted its biggest drop in more than a decade and unemployment reached a five-year high. For investors trying to look over the horizon and bet on a recovery, the storm clouds are getting thicker. Indeed, the news about the world's biggest economy is going from bad to worse. The jobless rate jumped in the third quarter as panicky businesses cut their costs to survive. Consumers who have single-handedly held up the economy for the past year are fighting back with their own cost-cutting, and their pullback on spending raises the risk the economy will be smacked by a full-blown recession. What may happen is that the third quarter may be a dress rehearsal for an even more dismal performance in the fourth quarter, which does not bode well for Wall Street. In September, consumer spending fell at the fastest pace in more than 14 years. It was the first drop since May 1999 and the biggest slide since January 1987. The gloom further stunned stock market investors, especially those worried about losing more money than they've already lost. Some retirement portfolios are down 50 percent or more since the market peaked and spiked down in March 2000. ``Sure, stocks may be bargains at current levels. But a lot of people don't have the money to buy after losing tons of cash over the last 19 months,'' says John Geraghty at North American Equity Services, a consulting firm. ``Then, there are those hundreds of thousands of people out of a job that won't be buying stocks until they find new employment.'' During the 1990s boom, the market was on a moonshot, thanks in part to millions of working people who regularly bought stocks through 401K retirement plans. The great times lasted until 2000 when the market bubble burst and the Nasdaq composite index crashed 67 percent from its high. ``The cash flow that helped boost stocks in the 1990s is no longer there,'' Geraghty said. ``And some of the (cash from) mutual fund redemptions probably won't be returned to stocks because the jobless people will be using that cash to survive.'' For example, investors pulled a record $29.5 billion from U.S. stock mutual funds in September, eclipsing the old high of $20.5 billion set in March. BLUE CHRISTMAS FOR RETAILERS? U.S. consumer confidence in October was the lowest in more than seven years. With consumer spending down, retailers may face a blue Christmas, especially those who get most of their profits from that holiday. Consumers are an awesome force in the world's biggest economy and it wasn't just a coincidence that the economy and consumer spending shrunk simultaneously in the third quarter for the first time in eight years. But it's anybody's guess whether the nation is facing a quick and dirty recession, such as in 1990-91. Indeed, the downturn nay be longer than most people expect. For one thing, the headlines about hundreds of thousands of layoffs or just hearing about friends losing their jobs, are starting to have a psychological impact, making people less secure about their own finances. The nation's jobless rate soared in October to 5.4 percent from 4.9 percent in September -- the highest in nearly five years. October's job losses were the sharpest for any month since May at 415,000 jobs. ``The key to the outlook for consumer spending is employment,'' says Ed Yardeni, chief investment strategist for Deutsche Banc Alex. Brown. ``It always has been. It always will be.'' The way things are going, the jobless rate may jump to 6 percent from 5 percent currently, he says. ``Then it might rise again and peak around 7 percent by next spring,'' Yardeni predicts. ``Soaring initial unemployment claims and the plunging Help Wanted Advertising Index confirm this scenario.'' When the jobless rate is 5 percent, a lot of people are still working and earning money. But when it increases to 6 or 7 percent, then a lot fewer people are working and a lot fewer dollars are spent, which heightens the risk of a recession. The recession has not been officially called, since it requires two consecutive quarterly declines to become official. But the risk is there after the economy had its sharpest contraction in more than a decade in the third quarter. Gross domestic product, the broadest measure of the nation's economic health, shrank at an annual rate of 0.4 percent in the three months ended in September. It sounded the alarm for a looming recession. OTHER WARNING SIGNALS Major spending cuts by consumers could unleash a domino effect that sets off another round of inventory adjustments by companies, which in turn brings new production cuts and more job losses. Even the Federal Reserve sees the writing on the wall. Robert McTeer, president of the Federal Reserve Bank of Dallas, said recently the shock to the economy from the Sept. 11 attacks on the World Trade Center and the Pentagon would likely tip the economy into recession in the second half of 2001. The only question is when will things rebound. The last recession was short-lived. ``This time is different,'' says Yardeni. ``The layoffs are permanent. Corporate business strategists are re-evaluating their long-term business plans and staffing needs. As they are doing so, many are concluding that they overhired during the past few years when long-term trends seemed so much more favorable.'' Indeed, the labor market may have no reason right now to look over the valley and see a recovery. And it may also be unrealistic to expect the stock market to shoot for the moon again because a sick jobs market and stumbling consumer spending will ultimately come back to take another bite at corporate earnings. For the week, the Dow Jones industrial average fell 224 points to 9,323. The Nasdaq composite index lost 23 at 1,745 and the Standard & Poor's 500 was off 17 at 1,087. (Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com.)