Money & Business
Money Watch: Dazed and Confused on Wall Street
Wall Street likes to climb a wall of worry. But this is getting ridiculous. For weeks, investors fretted that the economy was growing too fast and that inflation would rear its ugly head. Then investors began to worry that the economy might stall, increasing the likelihood of recession. Late last week, investors split the difference and began to lose sleep over stagflation--that 1970s condition marked by slow (or no) economic growth and high prices. Stagflation? Are they serious? The economy, while slowing, is still expanding at an annualized pace of around 3.5 percent. And let's face it. While inflationary pressures are clearly building--the consumer price index rose an unexpectedly high 0.6 percent in March--retail prices themselves have increased only 3.1 percent the past 12 months. That's a far cry from the double-digit inflation that '70s-style stagflation spawned. Yet by week's end, the Dow Jones industrial average, which in March was just 16 points shy of breaking through 11,000, came within a half a point of slipping back under 10,000. The markets then went through a rollercoaster ride at the end of the week. The irony is that the sell-off came as several bellwether companies like Intel and Bank of America reported surprisingly strong profits. Caterpillar blew past analysts' forecasts. "That shows that people are buying heavy machinery," says Neil Hennessy, president of the Hennessy Funds, "and you would think that's a good sign for the economy." It shows that major corrections in the stock market aren't necessarily predictive of anything. But it's important to remember that Wall Street does not need a recession to slip into bear mode. Indeed, since World War II, there have been 10 bear markets, according to Standard & Poor's. Of those, only seven correctly predicted a recession. At this point, S&P says there is only around a 25 percent chance of a recession in the coming 12 months. Unfortunately, Wall Street is willing to take that bet.
Money Watch: A Merger Wave That Could Help the Little Guy
To the growing list of Wall Street firms trying to merge their way out of trouble, add the New York Stock Exchange and Nasdaq. Days after the Big Board announced a merger with the upstart electronic exchange Archipelago and plans to go public, rival Nasdaq and a group of investors agreed to buy Instinet for $1.9 billion. Unlike traditional exchanges, Archipelago and Instinet are electronic communication networks that match buyers and sellers without a middleman. For mutual fund investors, the deals could be good. Fund consultant Geoff Bobroff notes the average commission paid by funds on stock trades has fallen from more than 5 cents a share to slightly more than 4 cents, and that trend should continue. The mergers should also make it easier for individuals to trade assets such as options and exchange-traded funds.
The Week Ahead: Slumping Sentiment
Throughout the decade, American consumers have been the real heroes of the economy. Yet even Superman has his moments of weakness. The kryptonite, it turns out, may be record gas prices. "There's no question there's been a deceleration in spending," says Paul Kasriel, chief economist for Northern Trust. Should consumers begin to worry about the stock market now, as Wall Street is in the midst of a major sell-off, it could lead to an even bigger slowdown in spending, Kasriel says. This week, two key surveys are due out that could shed additional light on the mood of consumers--one from the Conference Board and the other from the University of Michigan. Conventional wisdom says both sentiment indicators fell modestly in April, amid growing concerns over high gas prices and rising interest rates.
The Week Ahead: Slowdown
Economists have been ratcheting down their forecasts for first-quarter economic growth because of higher-than-expected inflation and disappointing economic data. Wall Street now believes gross domestic product rose 3.5 percent at the start of the year, not 4 percent as earlier thought.
Losing Steam?
Gross domestic product
4th qtr 2002 0.7 pct.
4th qtr 2003
1st qtr 2005 3.5 pct.*
*Estimate
Sources: Bureau of Economic Analysis, Reuters
Graphic by Rod Little-- USN&WR
This story appears in the May 2, 2005 print edition of U.S. News & World Report.
advertisement
