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Letter to the editor

Hope survives stock dip

A week of losses is unlikely to scare away investors.

By Times wires
Published October 20, 2007

NEW YORK - With all the predicaments facing the markets these days - credit growing scarcer, oil near a record $90 a barrel, home prices in the dumps - it would be logical if investors were shoving money under their mattresses, instead of into stocks.

But logic doesn't always prevail on Wall Street.

The Dow Jones industrial average plunged almost 370 points on Friday, its fifth-straight loss for the week. Yet, Wall Street's pundits did not waver on projections that share prices will rise after companies finish reporting quarterly financial results.

"There are a lot more people who are bullish than bearish, and there's a mentality that even a pullback would create an opportunity to buy," said Todd Leone, managing director of equity trading at Cowen & Co.

Why is Wall Street so optimistic, even though stocks got rocked Friday, with the Dow dropping 366.94, or 2.64 percent, to 13,522.02?

The Dow was off 4.05 percent for the week. For the year, the blue-chip index is up 8.5 percent.

Broader stock indicators also fell sharply Friday. The Standard & Poor's 500 index fell 39.45, or 2.56 percent, to 1,500.63, and the Nasdaq composite index dropped 74.15, or 2.65 percent, to 2,725.16.

For the week, the S&P 500 fell 3.92 percent and the Nasdaq fell 2.87 percent.

Friday's pullback pales in comparison to what investors faced 20 years ago. On Oct. 19, 1987 - Black Monday - the Dow plunged 23 percent amid concerns about interest rates and slowing economic growth. A decline of similar proportion, given the market's current levels, would mean a drop of some 3,000 points.

Friday's decline was the ninth- biggest point drop in the Dow since Black Monday.

While there are worries about the economy heading toward a mild recession, investors are still energized by the growth potential for U.S. companies. Companies might have had their most challenging quarter in five years, but they are still sitting on large cash stockpiles - and those with international units are able to take advantage of growth outside the United States.

Furthermore, Wall Street doesn't expect the credit turmoil will send a shock wave through other parts of the economy. The debt markets - roiled after defaults in subprime mortgages triggered a global aversion to risk - have remained mostly intact and problems appear to have not spread to other asset classes.

The credit markets appear to be relatively healthy compared with the anxieties from just a few months ago. There also appears to be little curb in consumer spending in the face of higher gas (the average price of a gallon of regular unleaded in the Tampa Bay area has risen only 3 cents in the past month, but 63 cents in the past year) and food prices, and that would only be helped further if the Federal Reserve, as is widely expected, cuts rates at its Oct. 30-31 meeting.

"Bull markets really don't die of old age," said Philip Dow, managing director of equity strategy at RBC Dain Rauscher. "The public might not be very bullish looking at what happened this week, but institutions are because there's a feeling that you can't miss the upside in trading."

[Last modified October 19, 2007, 23:02:56]