Sunday, October 13, 2002

Can Main Street revive Wall Street?

Some fear bear market could stall any recovery

By Martin Crutsinger
The Associated Press

Could Wall Street's troubles derail Main Street's recovery?

No two ways about it. Wall Street is in a funk, and some analysts fear the U.S. economy can't rescue it.

Since the technology-stock bubble burst in the spring of 2000, investors have been buffeted by a recession, terrorist attacks, a wave of corporate accounting scandals and, now, growing anxieties about a war with Iraq.

All the blows have sent stock prices sliding, wiping out more than $7 trillion in investor wealth. The just-completed July-September period was the worst quarter on Wall Street in 15 years, since the Black Monday stock market crash of October 1987.

The Standard & Poor's index of 500 stocks appears headed for its third straight losing year, something that hasn't happened since the Great Depression.

The carnage has gotten so bad that some analysts are beginning to question the basic assumption underlying their forecasts - that Main Street would eventually come to the rescue of Wall Street.

The widely held view was that the economy's rebound from last year's recession, as it gathered strength, would bolster the outlook for company profits and help lift stock prices.

But now, there is a worry that the disconnect between a Wall Street that is plunging and a Main Street that is recovering may get resolved in the opposite fashion. Instead of the real economy halting the slide in stocks, maybe the stock downturn has become so severe that it will derail the recovery.

“Wall Street's troubles are threatening to take the economy down,” said Mark Zandi, head of

A falling stock market can shake consumers' confidence, making them less willing to spend - an activity that accounts for two-thirds of the total economy. And falling stock prices also constrain the ability of corporations to hire new workers and buy equipment.

Both employment and business investment are missing in action so far in the current recovery, with the gap being filled by soaring sales of autos and homes as consumers respond to attractive zero interest financing offers and the lowest mortgage rates in 40 years.

But consumer confidence, buffeted by the market's renewed plunge and a new wave of layoff notices, has fallen for four consecutive months, raising concerns about how much longer consumers will be willing to spend.

Earlier this month, the government reported that the unemployment rate unexpectedly improved for a second straight month, dropping to 5.6 percent. The gain occurred even as businesses cut 43,000 workers from their payrolls and manufacturing employment declined for the 26th straight month.

Largely because of the boom in home and auto sales, economists believe the overall economy, as measured by the gross domestic product, was rising at about a 4.5 percent annual pace in the just-completed third quarter, far above the 1.3 percent GDP growth rate in the spring.

But economists have sharply trimmed their expectations for the current quarter because of fears that consumer spending - given continued layoffs in many industries and the falling stock market - will tail off sharply.

Chris Varvares, economist at Macroeconomic Advisers in St. Louis, said consumer spending will likely increase just a little over 1 percent in the current quarter, one-fourth the summer's pace.

The Bush administration is doing what it can to bolster confidence, dispatching Treasury Secretary Paul O'Neill to Arizona, Texas and Oklahoma this week for another in a series of road trips to counter Democrats' arguments that the Republicans have mishandled the economy.

But that effort may not have much impact on wary investors, who are shell-shocked after watching the Dow industrial average soar to a high of 11,722.98 in early 2000, only to shed 4,000 of those points since then.

Some economists wonder if the past 2 1/2 years mark the start of an extended bear market, like the late 1960s and 1970s.

Back then, the Dow topped the 1,000 milestone in 1966 and then didn't make it permanently above that level again until 1982, 16 long years later.

Even scarier than that scenario is the fear that the pricking of America's market bubble will mirror the problems Japan has faced for more than a decade. A similar investment collapse there has left the world's second biggest economy unable to mount a sustainable recovery.

“At some point, you start to worry that we could begin to look like Japan in the early 1990s with multiple years of stock-market losses, people getting more and more concerned and the economy stagnating,” said David Wyss, chief economist at Standard & Poor's in New York.

But even though concerns are rising, most analysts still insist that the most likely U.S. outcome is for a gradually improving economy to breathe life back into the market.

“The key will be some pretty clear signals that the economy is getting some traction,” said Tim O'Neill, president of the National Association for Business Economics, whose forecasting panel is projecting economic growth at a respectable 3.2 percent next year.

“If our forecast is right, with economic growth returning and that helping corporate profits, then all of that should be positive for the markets,” he said.

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