- The Washington Times - Monday, March 15, 2004

The Dow Jones Industrial Average plunged 137 points yesterday on worries that terrorism has re-emerged as a powerful factor influencing the world economy and upcoming elections.

Yesterday’s declines of 1.3 percent to 2.3 percent in the Dow and other major indexes come on top of losses of 5 percent to 8 percent last week on news of dwindling job gains and a terrorist bombing in Madrid attributed to the al Qaeda terrorist organization.

The round of losses has wiped out the market’s gains for the year. Some analysts say the market is facing its first major test since the bull run got going a year ago, with drops of another 5 percent to 10 percent possible in coming days.

Yesterday’s downdraft, which left the Dow not far above the 10,000 threshold at 10,103, came after news over the weekend that the Madrid bombing precipitated an upset in the Spanish elections that threw out the reigning party, one of the few in Europe to align itself with President Bush on the war in Iraq.

“The fact they are using democracy to turn against itself sets a very bad precedent,” said Dominic Konstam, a strategist at Credit Suisse First Boston, noting that the implications for the global economy and other upcoming elections — including the U.S. presidential election in November — are potentially worrisome.

“If anything like that occurred in the U.S. or elsewhere in Europe, it would cause a big dent in consumer confidence” and throw the still-fragile world economic recovery in peril, he said.

“The defeat of Spain’s ruling party and the recall of Spanish troops from Iraq by the new socialist government is a win for al Qaeda, which is likely to embolden terrorists,” said Ed Yardeni, chief investment strategist with Prudential Securities.

But after an initial dip, Mr. Yardeni expects the market to take this latest terrorist strike in stride because “we are all learning to go on with our lives and our business despite continuing attempts by terrorists to disrupt both.”

In fact, many investors likely view the terror-inspired panic selling of the past three trading days as a good opportunity to buy stocks that are destined for higher levels later this year, he said.

Mr. Yardeni is predicting major stock indexes will gain from 25 percent to 30 percent by the end of the year as a developing boom in the global economy generates higher earnings for corporations.

While heightened terrorism concerns, along with oil prices close to a 10-year high, could be a drag on economic growth, he said, they will be offset by the extraordinarily low interest rates being engineered by the Federal Reserve.

The Fed’s rate-setting committee meets today and is expected to keep rates at their 40-year lows.

While Prudential overall is optimistic on the market, technical analyst Ralph Acampora said stocks may fall further in the short term by as much as 5 percent to 10 percent before resuming their upward climb.

“The breadth of this decline is on par with the advance that we saw last year,” said Steven Sachs, director of trading at Rydex Funds in Rockville. “It appears this is not just a mild correction. A further decline is probably what we’re looking at in the near term.”

Even before the terrorist attack roiled world markets, stocks were getting whipped by the highly charged debate over jobs and the economy in the U.S. presidential campaigns.

Democratic presidential candidate Sen. John Kerry of Massachusetts has blamed Mr. Bush for a dearth of jobs that has left more than 2 million people unemployed and looking for work since he took office in 2000.

Standard & Poor’s Corp. analysts believe the constant Democratic criticism on jobs will continue to weigh on the markets and put a damper on consumer confidence.

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