Stocks tumble amid sell-off

Dow drops below 9,000

Nasdaq, S&P 500 at 5-year lows

recession fears rise

`The decline isn't over'

Hopes for strong recovery `out of sync with market'

July 11, 2002|By William Patalon III | William Patalon III,SUN STAFF

U.S. share prices plummeted yesterday - sending the Dow Jones industrial average below 9,000 for the first time since October and the broader Standard & Poor's 500 index to a five-year low - stoking fears that the current sell-off could plunge the country back into a recession.

"The decline isn't over and could accelerate through the summer," said Robert Mewshaw, president of Van Sant & Mewshaw, a Lutherville money-management firm. "Strong recoveries are felt in the pocketbook, and this one wasn't."

Historically, the stock market has been a dependable predictor of what's ahead for the economy - rallying in advance of a recovery and fading ahead of a downturn or recession. For much of this year, many experts have tried to explain the continuing bear market by saying that there has been an unprecedented disconnect between trading activity and the economy.

But the extensive sell-off, underscored by yesterday's tumble, is exposing such theories as wishful thinking, according to some analysts. And that makes it increasingly likely that an economy that only recently exited a recession will drop back into one, they said.

"There is a widespread view that the [stock] market may be out of sync with the economy," said John Hussman, portfolio manager with the Ellicott City-based Hussman Strategic Growth Fund. "Unfortunately, when the market activity disagrees with the opinions of economists, central bankers and the president, it is the market that has the better record of looking ahead. For that reason, the expectations for a strong economic recovery are actually out of sync with the market."

The Dow Jones industrial average yesterday dropped 282.59 points, or 3.11 percent, to close at 8,813.50. The 30-stock Dow last closed below 9,000 on Oct. 2 as it struggled to recover from post-Sept. 11 losses. Before the terrorist attacks on New York and Washington, the Dow hadn't had a lower finish since Dec. 16, 1998, when it stood at 8,790.60.

The Standard & Poor's 500 fared even worse than the Dow yesterday, falling 32.36 points - or 3.4 percent - to finish at 920.47. That index hadn't closed lower since July 21, 1997, when it ended the day at 912.94.

The technology-heavy Nasdaq composite index fell 35.11 points, or 2.5 percent, to 1,346.01. The Nasdaq last closed lower on May 19, 1997, when it was at 1,341.24.

Since May 31, the Dow has declined 11 percent, the S&P 14 percent and the Nasdaq 17 percent - a trend some experts expect to continue.

"This market has completely broken the spirit of investors," said Al Mirman, a strategist at V Finance in Sarasota, Fla. "It is going to take a good year for investors' confidence to be reinstated."

Not everyone is so glum about the stock market or the economy. Some experts attribute the continuing decline to a vacuum in investor confidence caused by such accounting scandals as Enron-Arthur Andersen, WorldCom Inc. - as well as worries that there may be more problems lurking ahead.

Qwest Communications, once an investor darling in the now-savaged telecommunications sector, said yesterday that it is under investigation by federal prosecutors, a revelation that experts said would only perpetuate the deep investor distrust of U.S. corporate management.

"I think we're getting a clear view of how people have lost their confidence," said David M. Citron, a partner with the Towson money-management firm of Wealth Management Services. "There's no support for the market to [rally] when there are questions about accounting" and corporate ethics.

Another issue may be the looming reporting period for second-quarter earnings, which aren't likely to be terrific, Citron said. The fear of profit warnings or so-called "negative surprises" is yet another weight atop stock prices, even though the economy appears to be improving.

"It's all about confidence," Citron said. "The economy's not getting worse, it's getting better."

But Mewshaw and Hussman disagree, contending that certain indicators point to an economy that is sputtering rather than recovering.

The U.S. economy has not experienced a double-dip recession since 1981, when a more-severe downturn followed the unusually short, five-month downturn of 1980, Hussman said. That underscores a rule of thumb that the shorter the downturn, the shorter the recovery that follows, he said.

Several indicators are hinting at another recession, Hussman said.

First, U.S. industrial capacity utilization remains low. That is important because low utilization means that there's no incentive for corporations to invest in new factories, machinery, computers or telecommunications equipment. Without such economy-boosting investments, it's all up to the consumer to keep the economy afloat.

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