- The Washington Times - Wednesday, September 25, 2002

The Dow Jones Industrial Average yesterday plunged 189 points to its lowest level since October 1998 as the Federal Reserve said the economic recovery was being overshadowed by geopolitical risks.
The Dow's 2.4 percent drop to 7,683 came as the Nasdaq Composite Index fell to a six-year low in a string of declines touched off by worries about war with Iraq, a softening economy and disappointing earnings news from major corporations.
The central bank for the first time alluded to concerns about Iraq in a statement, noting that "the emergence of heightened geopolitical risks" was clouding the economic outlook. The statement was issued after a daylong meeting of the Fed's interest-rate-setting committee.
But the Fed added that it expected the recovery to remain on track despite rumors of war, and noted that economic growth maintained a "moderate" pace throughout the summer. The central bank said the low interest rates should sustain that fledgling recovery.
While those words might have comforted the traumatized stock market, the Fed's decision not to cut rates further instead added to pessimism on Wall Street.
"A lot of the reason the market has been stumbling is because the outlook for growth and earnings was deteriorating. Then you have the Fed come in and say, 'Oh, we're not going to do anything about it,'" said Jeffrey Applegate, chief investment strategist at Lehman Brothers.
"Since you didn't get help on the policy side, the market went down some more."
Joel Naroff of Naroff Economic Advisers, however, said the Fed's disclosure that two out of 14 committee members had voted for a rate cut clearly left open the chance for action later this year.
Much could depend on developments in the Middle East, as the Fed made clear in the statement, he said. "The Iraq situation has now been thrust center stage.
"The uncertainty over the timing and the consequences of military action is creating problems in the equity markets and boardrooms," he said. "Like the rest of us, business leaders cannot figure out what will happen if war breaks out, and making business plans in such an unclear environment is quite difficult."
The uncertainty has kept buyers on the sidelines despite many enticingly low stock prices.
"No one wants to be heroic" and be the first one to step forward and start buying stocks after 2 years of steady losses, said David Strauss, investment manager at Johnston Lemon Asset Management.
The skittishness among shellshocked investors, combined with "a confluence of nothing but bad news," has driven stock prices down this month, and the market is staging a widely predicted test of the multiyear lows set in July, he said.
Even before the Fed released its statement, the market was falling on announcements from Weyerhaeuser Co. and Maytag Corp. that earnings would fall behind forecasts the latest in a series of discouraging news from major corporations to hit the market.
Corporate scandals also continued to weigh on the market, with news yesterday from Xerox Corp. that the U.S. attorney had opened a criminal investigation of its accounting practices. The company's stock plunged 71 cents, or 11 percent, to $5.96.
A report from the Conference Board that consumer confidence also had declined for a fourth month to levels not seen since directly after the September 11 terrorist attacks also contributed to the pessimism.
Consumers have been rattled by the fall of the market, talk of war and an uptick in joblessness, though their more downbeat mood so far has not crimped spending.
Mr. Strauss said the resilience of consumers come war or recession is one reason to be hopeful that the stock market may have seen "the worst of it for now."
While the Dow may fall further in coming days, he said, he is optimistic that the market will stage a rally by the end of the year. Stocks in a wide range of industries outside technology have fallen to bargain levels, he said.
"The fourth quarter could be pretty good. We're entering a more seasonably favorable time for the market," he said.
"You'd have to be pretty pessimistic on earnings at this point to think stocks don't offer decent value here. The history of the economy is that we go through these cycles. Earnings do fall off, but they do recover."

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