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Stock market agony worsens

Analysts say energy prices, interest rates, deficits and terrorism are feeding fears of an economic downturn.

By HELEN HUNTLEY
Published April 16, 2005

Friday's stock market plunge marked another bad day in a rotten week in what's turning into a decidedly lousy year for investors.

The Dow Jones Industrial Average fell 191.24 points to close at 10,087.51 on Friday. That put it down 374 points for the week, a 3.6 percent drop. Even worse, the Dow has given up all the gains from a pleasant February and March rally that sparked investors' hopes. The blue-chip stocks in the Dow are now off 6.5 percent for the year.

Nasdaq stocks have fared even worse, with the technology-heavy Nasdaq Composite Index off 12.3 percent year to date.

Overall, stocks are back to the levels of late October and early November.

What's going on?

"Clearly investors are nervous," said Clearwater financial planner Raymond Ferrara of ProVise Management Group.

"There's no one compelling reason for this to be happening," he said. "It's a combination of weighty things: energy prices, interest rates, inflation, trade deficit, budget deficit, terrorism. Any one alone could be a problem. Mixed together they're wearing people down. Add to that the insecurity of not knowing what earnings are going to look like and you've got investors saying "I'm going to take some chips off the table and wait and see."'

Friday was the worst day on Wall Street in nearly two years as investors reacted to a disappointing earnings report from IBM, which lost 8 percent of its value in one fell swoop. They also had to weather disappointing economic news tied to a slowdown in the auto industry and a poor report on consumer confidence.

However, it wasn't just one day's worth of reports weighing on the market.

"The price of oil staying at such a high level is really starting to impact the consumer," said St. Petersburg money manager Tim McIntosh of Strategic Investment Partners.

"In the corporate conference calls I've listened to, they've had very good demand in January and February and the first week of March, things just dropped off a cliff," he said.

McIntosh said the recent decline in oil prices and long-term interest rates will help, but it will take a while for their impact to work its way through the economy.

"Earnings are really the only hope for this market," said Brian Pears, head equity trader at Victory Capital Management in Cleveland. "If, on the whole, earnings can go up, then we might be able to overcome oil and inflation and all the other things. If they go down, we'll sell off further."

At the moment, investors are clearly more worried about the economy faltering than they are about inflation.

"The market is a forward-looking indicator and it's anticipating an economic slowdown," McIntosh said. "You can see it in the outperformance of the drug stocks," which are considered defensive investments in a downturn.

The good news is that long-term interest rates appear to be heading lower rather than higher as many economists had predicted going into the year.

Many brokerage analysts are cautious about the market. Jeffrey Saut, chief investment strategist for Raymond James & Associates in St. Petersburg, said the situation reminds him of persistent selling in the market in 1998 before the collapse of Long Term Capital Management.

"In 1998 we didn't know what the problem was and we get that same sense right here," he said in his daily market commentary.

Analysts who watch technical factors in the market are trying to discern whether this downturn signals the beginning of a new bear market or merely a correction in the upward trend of the past two years.

Some consider it a bad sign that the Dow Jones Industrial Average and the Dow Jones Transportation Average both closed at new lows for the year. Others say the reversal is expected after the runup in stock prices in February and March.

"What we're doing now is having a correction from those significant highs," said Richard Moroney, publisher of the Dow Theory Forecasts newsletter in Hammond, Ind. "If stocks go back up but both averages fail to make new highs and then go through the lows set in this correction, that will be a bear market signal."

Investors are obviously feeling gloomy. The American Association of Individual Investors surveys members weekly on their outlook for the market over the next six months. This week only 16 percent described themselves as bullish, down from 50 percent five weeks ago.

McIntosh interprets that as a good sign since individual investors usually are wrong about the direction of the market.

"We had two calls today from clients with concerns," he said. "Calls like that generally mark close to a low in the market."

Both McIntosh and Ferrara say they are putting money to work.

"Having the opportunity to buy back into the market where we were six months ago should be more of a positive than it is a negative," Ferrara said.

Information from Times wires was used in this report. Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.

[Last modified April 16, 2005, 01:38:37]