- The Washington Times - Tuesday, August 18, 2009

Stock markets around the world plunged Monday on worries that the U.S. consumer remains mired in debt and unemployment and will be unable to contribute to the much-heralded global economic recovery.

The Dow Jones Industrial Average lost nearly 200 points or 2 percent for a second straight trading session, and China’s main stock index plummeted nearly 6 percent as investors came to the realization that U.S. consumers — the prime engine of growth in the U.S. and around the world — remain on the sidelines of the emerging recovery.

Asian and European stock indexes fell 2 percent to 3 percent despite news that Japan emerged from a deep recession with nearly a 4 percent growth spurt, while meager growth returned in France and Germany in the second quarter.

“The key question investors are grappling with is whether the global economy can recover without support from the U.S. consumer,” said Adarsh Sinha, analyst at Barclays Capital. Reports out last week showed that U.S. consumer sentiment is falling while consumer spending — outside of a temporary surge in auto sales — remains depressed.

But while recent qualms about consumers are causing a setback for investors in stocks, oil and other commodities where prices have run up steeply since the spring, Mr. Sinha said the return of growth is genuine and can continue for a while without consumers.

The bounce back in the U.S. and much of the rest of the world is being led by a resurgence of production in industries such as autos that had plummeted with the shutdown of plants and bankruptcies in the first half of the year. The comeback in production, along with massive stimulus by governments around the world, accounts for the rebound in Japanese growth and will likely produce nearly 4 percent growth in the third quarter in the U.S., economists said.

The manufacturing revival is helping some laid-off workers who are able to return to their jobs, but so far has not lifted the spirits or spending habits of the nearly 300 million U.S. consumers without manufacturing jobs.

The rebound in growth, even if it leaves consumers behind and feeling nonplussed, is still good for the stock market, Mr. Sarha said.

“The growth has to go somewhere, and the most likely place appears to be corporate profits,” he said. “For that reason we remain optimistic about the medium-term outlook for equities” and other riskier investments.

After a big stock run-up of nearly 50 percent since March that peaked with the Dow and Standard & Poor’s 500 indexes hitting new highs for the year on Thursday, stock indexes also have been hit in recent days by a fresh onslaught of bank failures in the U.S. That threw cold water on investor hopes that banks were largely on their way back to health.

“The failure of Colonial Bank on Friday and the BB&T; takeover has equities on the defensive,” said John Rocket Spinello, a bond strategist with Jefferies & Co. who believes the stock market severely overestimated the health and vitality of U.S. banks and credit markets.

“The long-awaited corrective move is under way and will see equities move erratically lower,” he said. The stock plunge has helped safe-haven Treasuries, the dollar, and other less risky investments, he added.

Mark Frey, analyst with Custom House, a Canadian investment firm, said stock investors were unrealistic in expecting a quick and robust return to growth despite the deep troubles consumers are having obtaining credit and jobs. Consumers normally fuel about 70 percent of U.S. economic activity, relying in recent years on the easy credit provided by banks.

A report from the Federal Reserve Monday showed that banks and consumers continue to throttle back heavily on credit, a trend that has led to an unprecedented string of consumer-spending declines since last summer.

Nevertheless, banking stocks have more than doubled since hitting lows in March, while the stocks of beleaguered retailers have gained 35 percent so far this year.

For investors, the latest evidence that consumers remain tapped out came with a report Monday from Lowe’s, a top home improvement store, which said sales fell 19 percent in the second quarter.

“The market’s overwhelming bet of late that the seemingly straight-line path to economic prosperity would continue is now being drastically unwound,” Mr. Frey said.

The Dow’s 186-point plunge Monday left it at 9,135, still up 4 percent for the year. The S&P; fell through the key 1,000 threshold and ended at 980, but was still up 8.5 percent for the year.

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