- The Washington Times - Tuesday, October 1, 2002

Stocks finished their worst quarter since the 1987 market crash yesterday with major indexes hitting new four- to six-year lows.
The Dow Jones Industrial Average plunged more than 240 points to below 7,500 for the first time since August 1998 before recovering some. It ended down 110 points, at 7,592.
The Nasdaq Composite Index set a new six-year low of 1,172, while the Standard & Poor's 500 Index fell to 815 after briefly dipping below 800. Stocks in Europe were hit even harder with losses ranging from 5 percent to 6 percent.
Tim Leach, chief investment officer at Wells Fargo Private Client Services and a 20-year Wall Street veteran, called this summer's market collapse the "coup de grace" after a pathetic 2-year performance. Stocks now appear headed toward a third straight year of losses, something not seen since World War II.
"I would take '87 any day over what we have now," he said, noting that the steep, sudden downturn that year turned out to be a temporary setback after a long bull run from which the market quickly recovered and "got back to business."
Investors in today's bear market have gone numb and are ignoring fundamentally good news such as strong housing and consumer spending, and the lowest inflation and interest rates in a generation, he said.
The Dow and the S&P; both fell 18 percent in the quarter ended yesterday, the most since October 1987. Stock mutual funds lost 15 percent on average, which is likely to alarm 401(k) investors when they receive their statements later this month.
"An avalanche of tough news and fear is overwhelming any positives out there," Mr. Leach said.
"Certainly one of the headline issues is the upcoming war it looks like we are locking ourselves into and what that will mean to the world economy," he said, predicting that any spike in oil prices caused by war in Iraq would be "a very tough drag on what is already a weakening economy."
A report from the Commerce Department yesterday showed that consumer spending and incomes continued to grow solidly last month. But it was accompanied by news from Walgreen and Wal-Mart, both major retailers, that sales have turned disappointing in recent weeks.
The retail news weighed on the market and illustrated the central problem investors have with the economy, that growth is not strong enough to improve profits, Mr. Leach said.
"This is symptomatic of an economy that has really not come to life yet. We are stuck in neutral."
Small and large investors alike have become "distraught" with the relentless bear market, he said, and increasingly are hoarding their cash in low-paying investments such as money market mutual funds that yield 1 percent.
But Ed Yardeni, chief investment strategist with Prudential Securities, said the record $6 trillion of cash consumers have stowed away is proof that "consumers are hardly as financially stressed as widely believed."
While job opportunities have been scarce for employed and unemployed workers alike, disposable incomes have continued to grow, thanks to soaring productivity and low inflation and taxes. Most consumers' stock losses have been offset by sizable gains in the values of their homes, which are their chief assets, he said.
"When consumers decide that the outlook for the economy and stocks isn't as bad as they currently fear, both the economy and stocks should benefit from the mountain of liquidity," he said.
In the meantime, investors have found "no place to hide" in the bear market, with popular investment strategies used by mutual funds, ranging from growth to value to small capitalization, all suffering severely in this year's downdraft, he said.
Prudential's Ralph Acampora said Wall Street is going through the worst bear market since the one in 1973 and 1974. But he said the market may enter the "capitulation" phase and hit bottom in the next month or so on a "very climactic event."
While most Federal Reserve governors and economists say the economy is in recovery and a return to recession is unlikely, a rare dissenting voice spoke out yesterday.
Robert McTeer, president of the Fed's Dallas reserve bank and one of two Fed officials to vote for an interest-rate cut last week, ratified the dim view of investors in an appearance before the National Association of Business Economists.
"We know that something's wrong with the economy" because of anecdotal evidence such as airlines selling fewer tickets, hotels renting fewer rooms and retailers' sales slowing, he said. "Demand is weak, growth is below potential We need faster growth."
Mr. McTeer said he expects unemployment to keep rising because companies aren't hiring. He suggested that the unemployment rate has stayed artificially low below 6 percent because many discouraged workers have simply dropped out of the labor force.
The economists' group released an upbeat forecast yesterday predicting growth will accelerate above 3 percent next year without further rate cuts by the Fed.
But the group said the stock market debacle and rising oil prices this year already have shaved 0.7 percentage points off growth and that war in Iraq could compound those losses.
One "happy" turn of events, the group said, is that interest rates have plunged to 30-year lows as stock-weary investors dived into bonds, spurring a record wave of mortgage refinancings. That is partially offsetting the stock losses and will add 0.4 percentage points to growth in the next year, it said.

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