- The Washington Times - Tuesday, September 24, 2002

Signs of a faltering economic recovery drove the Nasdaq Composite Index yesterday to its lowest level in six years a first for the "new economy" index.
The Nasdaq fell 36 points, or 3 percent, to 1,185, its lowest level since September 1996. This is the first time any U.S. stock index has lost so much ground since the 1974 bear market.
The Dow Jones Industrial Average lost 114 points and plunged, with other major indexes, to four- and five-year lows after the price of oil jumped to more than $30 a barrel, intensifying fears among investors that a war with Iraq will further weaken the economy.
Even before trading began on Wall Street, major indexes in Europe were falling to five- and six-year lows on worries that a war in the Middle East would send the United States back into recession, threatening global economic recovery.
"The odds of an attack are rising" after Iraqi President Saddam Hussein said he would not comply with any new U.N. resolutions negotiated by the United States, said David Jallits of Strategic Fixed Income LLC. "People are flocking to havens" such as Treasury bonds and getting out of stocks, he added.
News from the Conference Board yesterday that the index of leading economic indicators declined for a third straight month appeared to indicate that the U.S. recovery is headed for a stall in three to six months even without a war.
Ken Goldstein, economist with the New York business research group, said the index's 0.2 percent decline last month reflected an economywide weakening, from stocks to consumer confidence to joblessness, with only one of 10 indicators pointing to a recovery.
"There is a danger that this weak recovery could stall, especially if the consumer market starts to slow," he said. Even as he spoke, Wal-Mart, the world's largest retailer, said its store sales are slowing, provoking a slump in consumer stocks.
The Dow fell 1.4 percent, to 7,872, adding to a 3.9 percent drop last week. The index has lost almost 1,200 points since Aug. 22 on concerns about the economy and a war.
In Europe, Britain's FTSE 100 index fell 3 percent, France's CAC 40 index tumbled 3.3 percent, and Germany's DAX 30 index plunged 5 percent their lowest levels in five to six years.
European shares were undermined by a close election in Germany that left the ruling coalition in power but weakened its mandate to carry out structural reforms in the country's stagnant economy.
Sung Won Sohn, chief economist with Wells Fargo & Co., said the zesty pace of spending by U.S. consumers this summer, when the lowest interest rates in a generation inspired a spending spree on cars and homes, is not likely to continue.
That means that housing and auto sales the strongest points in the economy last year could become a drag on growth this fall, he said.
The Iraq situation further muddies the recovery outlook, as a war against the major Middle East oil producer could send oil prices spiking to more than $40 a barrel, Mr. Sohn said. High oil prices act like a tax, zapping consumer and business purchasing powers.
"A lengthy and costly war would mean more economic shocks, guaranteeing a recession," he said. "This is a main concern in financial markets."
Edward Yardeni, chief investment strategist with Prudential Securities, said the disappointing economic news and talks of war are hurting stocks, but he expects the economy to muddle through without falling back into recession.
"While the recovery has stalled, we view the recent setback as temporary," he said. He attributed the market's recent troubles primarily to bad earnings news from major corporations.
"The bombs are starting to fall," he said. "Last week, McDonalds, EDS, JP Morgan Chase and Morgan Stanley dropped some bombs on the stock market when they preannounced that their earnings for the third quarter would be well below consensus forecasts."
Yesterday, JDS Uniphase Inc. continued the trend, lowering its outlook for the first quarter. The optical technology firm's stock fell 10 percent, and the announcement helped touch off sales of technology stocks ranging from Microsoft to Texas Instruments.
"This development, combined with concerns about a likely war with Iraq, suggest that the outlook for stock prices may remain challenging through the end of the year," Mr. Yardeni said.
Prudential and several other Wall Street investment houses are warning that the major indexes are in a stage of "retesting" the multiyear lows set at the end of July, which many analysts believed had established a "bottom" for the 2-year-long bear market.
While many stocks have dropped so low that they appear undervalued, Mr. Yardeni said he is counseling investors to avoid buying new shares right now.
"I doubt that stock prices can rally significantly until the Iraq issue is resolved," he said. "In the meantime, stock prices could continue to fall."

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