If the Pros Are Down, Is That Why Stocks Are Too?

The stock market was off to a modest rally early Friday morning. Then came a news flash about an explosion on a gasoline-carrying barge near New York’s Staten Island.

The Dow Jones industrial average fell 100 points in a matter of minutes. The decline halted as it quickly became apparent the explosion was an industrial accident, not another terrorist attack.

But on Wall Street, just a few miles across the water from Staten Island, the billowing smoke from the barge undoubtedly replayed some awful memories from Sept. 11, 2001.

Fear of nightmarish new attacks isn’t limited to New York, of course. The entire country is on Code Orange alert. But for obvious reasons, the concern resonates deeply in the nation’s financial capital.

And with the securities industry in a severe recession after three down years for stocks, the psychological double whammy for Wall Street denizens -- fear for life and limb and fear for one’s career -- raises interesting questions about the effects on markets themselves.

If many of the money managers, traders, analysts and other market professionals in New York see the world through a dark prism, does that limit the chances for stocks to decisively break out of their funk anytime soon -- even apart from however the Iraq situation is resolved?

These are people who directly control trillions of dollars and who advise millions of other investors on what to do, or not to do, with their money.

“A good chunk of the financial world’s visible opinion originates within a couple miles of Wall Street,” noted Charles Crane, chief investment officer for Victory SBSF Capital Management.

He is one of those New York opinion-makers, working from a 33rd-floor office in Midtown Manhattan’s Rockefeller Center -- a high-profile potential target for terrorists, Crane points out.

Like other New Yorkers, Crane has changed some of his routines in the wake of Sept. 11 and the continuing risk of attacks. He no longer takes the subway, for example, preferring to ride the bus instead, because “it gives you more flexibility in reacting” to a disaster, he said.

But have his concerns affected Crane’s decisions with the $3.5 billion in stocks that he manages? As a market forecaster, he jokes, one advantage he enjoys after the dramatic events of the last three years is that “I can say anything I want about what might happen and you can’t say I’m crazy.”

With the portfolio itself, however, Crane said he has become more bullish recently despite the increasing gloom over the threat of a U.S.-Iraq war.

“I’m optimistic about the potential for the market over the next 12 to 24 months,” he said. “It seems prudent to be buying stocks if you think valuations are reasonable, which I do.”

By contrast, optimism is in relatively short supply among the ranks of brokerage analysts who cover individual companies. Many of those analysts live and work in New York.

Research firm Thomson First Call, which tracks analysts’ advice on stocks, says its tally of 24,000 recommendations shows that 45.5% now are “buy” ratings, 43.9% are “hold” ratings, and 10.6% are “sells.”

The percentage of buy recommendations has plunged over the last year. It was 62.5% on April 1, when just 2.6% of recommendations were sells and 34.9% were holds.

But it’s impossible to determine how much of analysts’ change in tone may stem from the general mood on Wall Street -- marked by fear of terrorism and declining job security -- and how much reflects skittishness about running afoul of regulators who have slammed brokerages for their overly sunny outlooks as shares collapsed in 2000 and 2001.

Likewise, there is no way to measure whether portfolio managers on Manhattan’s Park Avenue are any more bearish than those on, say, Wilshire Boulevard or Michigan Avenue. If the stock market records four straight down years, it probably won’t be because New York investors alone were selling or refraining from buying.

Steven Wieting, an economist at brokerage Salomon Smith Barney in New York, says the level of uncertainty facing markets and the economy is demanding caution on the part of most money managers -- because that is what clients expect.

“Investors who have a fiduciary responsibility to clients are going to be less aggressive at taking risks now,” Wieting said. That has translated into shrinking trading volume in the stock market in recent weeks as shares have mostly drifted lower. Despite modest net gains the last two weeks, the Dow, at 8,018.11 on Friday, is down 3.9% this year.

Ultimately, of course, Wall Street is in business to make money, and to be cold-blooded about it if necessary.

“I think basically you have to block it out,” Jan Hatzius, an economist at Goldman Sachs & Co. in New York, said of personal terrorism concerns and how they could color his outlook for markets and the economy.

Yet he conceded that that may be more difficult now for some New York-based investment pros than in the immediate aftermath of Sept. 11.

“I was amazed at how quickly things got back to some semblance of normality after 9/11,” Hatzius said. But that may have reflected a natural defiance in the face of the attacks, he said.

“It makes sense that it has taken some time for people to face up to things,” he said.

That may be true of investors everywhere, not just in New York. The markets need Wall Street decision-makers to feel better about taking risks and making long-term bets, but it will require more than just their help to turn the tide.

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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to www.latimes.com/ petruno.