Saturday, April 16, 2005

Stocks Plunge to Lowest Point Since Election

The The New York Times reports that
stocks tumbled to their lowest levels since the presidential election yesterday, extending a recent slump that has come amid fears that economic growth is slowing.

The sell-off yesterday was ignited by surprisingly weak earnings from I.B.M., and steepened throughout the day. It was the worst single day for the market this year and capped the worst week since August.

But it may be that general uncertainty - something that the stock market and millions of investors have never warmed to - is the real force behind the decline.

While some economists are now suddenly predicting slower economic growth, others are not. And no one is talking about a slump. Federal Reserve officials have been worried about inflationary pressures, but any economic slowdown might help relieve those.

'Right now it's a no vote on the economic outlook for the next six months,' said Joseph Liro, an economist and market analyst with Stone & McCarthy Research Associates. 'And that is because of the uncertainty about the impact of oil' on consumer spending, corporate profits and inflation, he said.

The persistence of crude oil prices above $50 a barrel, he said, 'is certainly doing something to consumer sentiment,' a fact reflected in the decline in April consumer confidence reported yesterday.

Worries that the economy may be softening flared up this week after reports showed weak monthly retail sales and an unexpected surge in the nation's trade deficit with the rest of the world. Many economists have lowered their estimates on how much the economy grew in the first three months of the year and are reviewing their forecasts for the rest of the year.
Not mentioned in this article was a comment by the IBM CFO. Reuters reported that IBM
Chief Financial Officer Mark Loughridge said the company had trouble closing short-term services contracts in the last two weeks of March and that, as a result, he could not predict whether IBM would live up to analysts' second-quarter targets.
Furthermore, those who do what's called technical analysis on stock prices claim that the stock market indices have reversed their primary upward trend (which presumably took effect when the Dow rose about 10,400 last November) and are now heading downward. If you look at the accompanying chart, prices seemed to peek in January of last year and have been heading slowly downward since then. The period between the election and now looks like a brief Republican bubble, which has since burst. The current question is how far lower will prices go.

Large, round numbers like 10,000 on the Dow are always psychological barriers. It will be interesting to see what happens if we get there or to 9,700.

Of course trends change all the time, and so-called technical analysis is like reading tea leaves. But nonetheless, something does seem to be happening. It may be that the Federal deficit, the trade deficit, the price of oil, etc. are starting to take their toll.

When the markets crashed a few years ago, a longer term prediction was that the following few years would see no long term price trend but that prices would see-saw over a price range for quite a few years. Perhaps that's really what's happening. The second chart gives a longer-term view.

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