Stock Market Drops Sharply on Jobs Report
Stock prices plunged anew Friday, pushing a key share index to its lowest level in nearly three years and making the current market downturn the longest since the early 1970s.
Wall Street’s slide on the heels of a dismal August employment report left many observers fearing there are more losses to come, and raised the risk that investors who have held on throughout the long slump finally may decide to dump their stocks.
At the heart of the sell-off was mounting fear that the economy has yet to hit bottom--and that even if it has, corporate profits could remain depressed for an extended period.
“We’re still in a bear market,” said David Tice, who runs a Dallas-based investment firm. “Everybody thought it would be a V-shaped recovery. There’ll be more pain in the stock market and in the economy.”
The market’s almost continuous slide in recent weeks--it has fallen on nine of the last 10 days--sends an ominous message to the Federal Reserve and to Bush administration policymakers.
Historically, stocks have begun to rebound about six months ahead of the economy. The lack of a rally, despite seven interest rate cuts this year by the Fed and despite the administration’s huge tax cut, raises the specter that the economy might not turn up until sometime next year--far later than many forecasters are predicting.
“There’s no evidence in any of the markets that a recovery is coming any time soon,” said Jim Paulsen, chief investment officer of Wells Capital Management in Minneapolis.
On Friday, the Standard & Poor’s 500 index, a broad measure of the stocks of the nation’s largest companies, fell below the low it reached in April. The index slid 20.62 points, or 1.9%, to 1,085.78, breaching the April 4 closing low of 1,103.25.
Stocks rallied for nearly two months after reaching that April nadir, raising hopes that the bear market had run its course. But prices backtracked in the summer, with the decline accelerating in the last month amid concern that the weakening global economy was at risk of falling into recession.
The new low for the S&P; 500 means the bear market that began in March 2000, when most major indexes peaked, now is 18 months old. That is far longer than the average post-World War II bear market duration of about 10 months and rivals the 21-month slide of 1973-74 that accompanied the first global oil crisis, soaring inflation and the Watergate scandal.
What’s more, the drop in the S&P; 500 from its peak now is 29%--the deepest loss since the index tumbled 34% in the 1987 bear market, a decline that ran its course in a mere three months. Many technology stocks have fallen 80% or more from their peaks.
For the average investor, the prolonged bear market has ravaged retirement savings accounts and caused individuals to question the standard advice of holding stocks through thick and thin. So far, many small investors still appear to be holding tight. But analysts worry that they could change their minds in coming weeks if prices skid further.
For the economy, the market’s continuing losses raise the risk of a deepening “reverse wealth effect.” As investors’ portfolios shrink, they may further rein in their spending, making it harder for the economy to recover.
The same is true of companies, analysts say. “Corporate CEOs watching their stock price fall every day are hardly going to walk out of the room and order an increase in capital spending,” Paulsen said. “Rather, they might order more cuts because they think [the economy] is not getting any better.”
The failure of the Fed’s rate-cutting campaign to spur stock prices has begun to spook more investors, experts say. In 13 periods from 1971 to 1998 that the Fed was slashing rates to help the economy, the S&P; 500 index was up more than 12%, on average, six months after the cuts began.
This time, more than eight months after the first Fed cut on Jan. 3, the S&P; index is down 15.4%.
Nevertheless, bullish analysts argue that the worst of the economic and market damage already has occurred. They say it is common for stocks to fall hard in a bear market, rally for a few weeks or months and then sag back toward the earlier low. In Wall Street parlance, the market “retests” its bottom and passes the test if stocks rally shortly after reaching the old lows.
Bulls argue that the sheer length of the market slide is evidence that stocks are closing in on a lasting recovery. “What are the odds that selling after an 18-month bear market is a good move?” said Charles Blood, market strategist at investment firm Brown Bros. Harriman & Co. in New York. “Unless we’re headed for the Great Depression, history says that’s not a good idea.”
Still, experts say the market will face powerful head winds throughout the autumn.
Historically, the July-through-October period has been the market’s weakest stretch of the year, a psychological factor that could weigh on investors’ willingness to step up and buy depressed shares.
Also, most stock mutual funds close their fiscal years Oct. 31 and thus engage in tax-related selling in September and October, dumping their losers.
Perhaps most important, a growing number of companies have been warning that their earnings in the current quarter ending Sept. 30 will be below already-lowered expectations, as the economy continues to struggle.
Indeed, stocks in recent weeks have been driven down by an almost daily litany of profit warnings from corporate America.
On Friday, for example, AMR Corp., the parent of American Airlines, said second-half losses will be larger than expected because of higher costs and a severe drop in business travel.
A day earlier, cell-phone maker Motorola Inc. and clothing retailer Gap Inc. issued profit warnings, sending their stocks plummeting.
Investors’ greatest fear is that U.S. consumer spending, which has remained relatively strong this year, could finally collapse under the weight of mounting layoffs, striking a further blow to companies’ earnings prospects.
Analysts also are growing increasingly pessimistic about the condition of the global economy. The Japanese economy sank at a 3.2% annualized pace in the second quarter, and Europe’s economy has weakened significantly.
“There is no other engine of growth besides the U.S., and we’re slumping,” said Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter in New York.
Though tech stocks have led the market’s slide over the last 18 months after peaking at extraordinary levels in early 2000, selling over the last month has spread to many other market sectors.
Yet there have been rays of hope for the economy in the last few weeks, with a few statistics pointing to improvement ahead--such as in the manufacturing sector.
A handful of major companies also have announced that the worst appears to be over for their sales and earnings. Late Thursday, semiconductor leader Intel Corp. said sales this quarter are generally tracking earlier forecasts, bringing mild relief to investors fearing an even more dramatic falloff in the personal computer industry.
But investors have almost uniformly dismissed such signs. Many doubt the accuracy of corporate forecasts. “I see companies trying to make statements that are a little bit upbeat, but when you pin them down you find [the information] is spurious and that their business is still deteriorating,” said Henry Herrmann, chief investment officer at mutual fund group Waddell & Reed in Overland Park, Kan.
The selling of stocks in response to almost any news--good or bad--is a classic sign of bear-market psychology, analysts say.
“Frankly, it looks like the market takes good news as bad news, bad news as bad news and no news as bad news,” said Ben Inker of Boston-based money-management firm of Grantham, Mayo, Van Otterloo & Co.
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Bear History
Here are the bear markets of the post-World War II era and how long the declines lasted.
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Pctg. decline Duration of Year(s) in S&P; 500 decline (months) 1957 --20% 3 1961-’62 --29% 6 1966 --22% 9 1968-’70 --37% 18 1973-’74 --48% 21 1981-’82 --22% 13 1987 --34% 3 1990 --20% 3 2000-present --29% 18 (so far) Average* --29% 10
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* Does not include current decline Source:Bureau of Labor Statistics, David L. Babson & Co., Times reseach
