U.S. Stock Market Recovery Unlikely as Politial, Economic Woes Abound
Recovery Is Unlikely in Coming Weeks: U.S. Stock Outlook
New York, Sept. 18 (Bloomberg) -- For U.S. stocks to suffer in coming weeks, world economies and President Bill Clinton's legal woes don't have to get any worse. All that has to happen is for the climate not to improve, analysts said.
That was the main problem this week, when stock market investors thought the Group of Seven industrialized countries might agree on policies to help rescue the world's economy from a looming slowdown, mostly through coordinated interest rate reductions in Europe and North America.
Instead, Federal Reserve Board Chairman Alan Greenspan told Congress on Wednesday not to expect the world's biggest central banks to come to the rescue. ''Investors are becoming more sober, and are looking for some leadership, some decisive move, some clarity from the Federal Reserve,'' said Frederic Russell, who manages $80 million in stocks at his own firm in Tulsa, Oklahoma.
Shareholders may want resolute action from the world's leaders, but they're not getting much. President Clinton's administration is paralyzed by the House Judiciary's Committee's debate over whether to begin impeachment proceedings. German Chancellor Helmut Kohl faces re-election Sept. 27 and Brazilian President Henrique Cardoso on Oct. 4. Japan is still trying to right its ailing banks and boost consumer spending.
Deteriorating Profits
Other obstacles -- mainly, deteriorating corporate profits - - stand in the way of any prolonged recovery in U.S. share prices.
That was reflected in the past week's performance, when stocks made halting progress recovering from the summer's lows reached Aug. 31. The Dow Jones Industrial Average gained 1.3 percent, its second weekly rise, leaving it 15 percent below its July 17 peak.
The broader Standard & Poor's 500 Index advanced 1.1 percent, the Nasdaq Composite Index climbed 1.4 percent and the Russell 2000 Index of small stocks added 2.7 percent.
Next week, investors will get earnings news from retailer Bed Bath & Beyond Inc., investment bank and broker Morgan Stanley Dean Witter & Co., air freight company FDX Corp. and computer chip make Micron Technology Inc. Next Thursday, the government releases August's durable goods report, followed on Friday by August consumer spending and home sales figures.
Bellwether consumer companies such as Gillette Co. warned this week that earnings will be hurt by recessions or slower growth in Asia and Latin America, adding their voice to similar recent pronouncements made by Walt Disney Co. and Procter & Gamble Co. ''More than half of the Dow 30 is going to show an earnings decline this quarter,'' said Joseph Abbott, equity strategist at IBES International Inc.. ''That hurts. This very well could be the one quarter where earnings growth is negative,'' for the first time since late 1991, he said.
Diminished Expectations
In the beginning of July, analysts forecast third-quarter earnings growth of 8 percent over the same quarter a year earlier. Now the estimate is of a 1.1 percent decline, IBES said.
Some industries have been crushed, most notably financial stocks. BankBoston Corp. on Wednesday said its third-quarter trading loss will be 50 percent higher than it originally thought, one day after BankAmerica Corp. said its trading loss will surpass $330 million in the quarter, also 50 percent higher than originally expected. ''In the banking sector, there are certainly some real problems,'' resulting from problems not only in Asia, Latin America and Eastern Europe, but also in the U.S. mortgage and junk bond markets, said Russell. ''Banks with a lot of Asian exposure have a real need to look at their credit quality, and investors need to examine whether some of those loans are truly those assets that they've expected them to be.''
Other signs of weakness in the U.S. economy are coming from capital goods makers, such as steel companies that are also expected to post weaker profits, and economically sensitive trucking companies.
On Thursday, J.B. Hunt Transport Services Inc. of Lowell, Arkansas, tumbled 26 percent after warning that a slowdown in rail service and a drop in the use of its container and trailer fleet would cut as much as $30 million from third-quarter sales. That followed by one day a similar warning from Arkansas Best Corp. that drove down its shares 30 percent.
Sputtering Economic Growth
Disappearing profits are in many cases a symptom of slower economic growth, and the news on that front isn't too cheery. Asia has been lost in a funk for over a year, and now Brazil looks to be leading Latin America down a similar path. Meanwhile, the U.S. and Europe are winding down.
Economists at Salomon Smith Barney this week lowered their forecast of U.S. economic growth in 1999 to between 1 percent and 1.5 percent, down from this year's estimate of 3.1 percent. On Wednesday, the Federal Reserve said the economy may be slowing amid waning consumer confidence.
Overseas, the International Monetary Fund released a report Friday saying the turmoil in Russia and other emerging markets might further trim Germany's growth.
Also on Friday, Ford Motor Co. said its Argentine subsidiary will slash production by 40 percent through the end of the year because of shrinking sales in Brazil,, the unit's biggest market.
Nor are the stock market's internal characteristics inspiring much confidence. Weak rallies follow fearful selloffs and show a disturbing lack of momentum, analysts said. For example, when the Dow industrials soared 380.53 points, or 4.98 percent, one day last week, the average promptly lost 405.24, or 5.05 percent in the next two days. ''We are still waiting for the other shoe to drop,'' said Ned Riley, who helps oversee $24 billion as chief investment officer at BankBoston Corp. ''The environment outside of the U.S. is still very precarious and quite dark right now.''
Even Warren Buffett, arguably the bull market's most celebrated investor, echoed the mood of pessimism when his Berkshire Hathaway Inc. holding company said it held $9 billion of cash, up from $7.1 billion it reported at the end of June. Buffet's pool of cash, his largest ever, suggests the Omaha, Nebraska-based investor is turning more bearish and unwilling to buy more stocks under current conditions.
Message From Bonds
The best news for equity investors to chew on these days comes from the bond market, where interest rates are at a 30-year low. On Friday, yields on benchmark 30-year Treasuries slid to 5.14 percent, down from 6.07 percent as recently as April.
Lower interest rates usually save the day for stocks by making a company's future earnings more valuable, and leading investors to pay premium prices in the form of higher price-to- earnings ratios.
But many investors say interest rates won't be enough to bail out stock prices this time. The problem today, they say, is that bond yields are tumbling in anticipation of slower economic growth -- a condition that's anathema to stocks.
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