Wall Street of Worry
The war in Iraq, terrorism, rising oil prices--and now the threat of higher interest rates--are all preying on the market
There comes a point in virtually every bull market when the risk takers step aside, giving way to the worrywarts on Wall Street. That's where the market finds itself today, at a crossroads that could lead either to the second year of this bull market or down a dead-end street.
Last year, investors eagerly confronted the risks in the market in hopes of booking big profits. That's because the most speculative investments--emerging-market stocks, junk bonds, even shares of risky dot coms--led the rally back then.
But in recent weeks, sentiment on the Street has changed dramatically, and for the worse. Today, investors are acting less like contestants on Fear Factor and more like Tony Soprano, riddled with so many anxieties they've become paralyzed.
In fact, since February, the Dow has tumbled about 800 points and now struggles around the 10,000 mark. All the major stock market indexes are underwater year to date. "We've just been through one of the longest rallies in the past 100 years of market history without a 5 percent correction," says Alan Skrainka, chief market strategist at Edward Jones. "What we have now seen is a correction that has taken us down around 7.5 percent. This isn't shocking."
Maybe, but the market seems to be stuck in a trading range. Not only is the Dow having difficulty working its way back to its 11,750 peak in 2000; it can't seem to move past 10,000 with any conviction.
Deja view? The big fear now is that the market is looking a lot like it did in the 1970s, when growing uncertainties in the Middle East and a combination of rising oil prices, inflation, and interest rates kept stock prices stuck in a rut that lasted more than a decade. Back then, it took the Dow about 15 years to work its way permanently past 1000. Could history be repeating itself as the index tries so hard to push past 10,000?
There are additional worries that are rattling the markets this time around. "We've dealt with rising prices before, and we've dealt with rising interest rates," says Joseph Quinlan, chief market strategist for Banc of America Capital Management. "But we haven't dealt with the possibility of a U.S.-induced civil war in the Middle East." This uncertainty, along with reduced U.S. refining capacity, is to blame for record energy prices, as crude oil has topped $41 a barrel.
Add to this yet another concern--the growing fear that the red-hot Chinese economy may be cooling, threatening what has been a synchronized global recovery. Even news of the surprise election victory of the Congress Party in India has raised concerns about what that could mean for economic reforms in the world's largest democracy, though an economic expert has been chosen as prime minister. "In terms of walls of worry, this is a classic," says James Stack, editor of the InvesTech Market Analyst newsletter. "The geopolitical and economic environments are throwing almost every conceivable worry at the investor."
But are things really as bad as they appear? It's true that inflationary pressures are building in the economy, and, eventually, rising prices threaten consumer demand and corporate profits. Earlier this month, the Labor Department reported that consumer prices rose 2.3 percent over the past 12 months, with healthcare, food, and energy costs increasing substantially faster. And according to a recent survey by Merrill Lynch, 86 percent of U.S. fund managers think inflation is headed even higher over the next 12 months. But keep in mind that prices are rising because the economy is improving and jobs are finally being created. In that sense, "a little inflation can be a good thing," says Quinlan.
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