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Economic Worries Halt Stock Gains

Key indexes rally for a second consecutive quarter, but new doubts cloud the outlook.

October 01, 2003|Tom Petruno | Times Staff Writer

Wall Street's confidence in an economic rebound pushed major stock indexes higher in the third quarter, but a growing number of investors in recent weeks seemed to be having second thoughts.

The quarter ended Tuesday with a broad sell-off -- the sixth decline in the last eight sessions -- that pulled the Dow Jones industrial average down 105.18 points, or 1.1%, to 9,275.06.

Still, the Dow posted a gain of 289.62 points, or 3.2%, for the three months, after rallying 12.4% in the previous quarter.

Other major indexes also scored their second consecutive quarterly gains, though they have slumped in recent days.

"I think you have to stay with a bullish stance" on the economy and the stock market, said Joe Keating, chief investment officer at AmSouth Bancorp in Birmingham, Ala. "But I admit I have a little less of a comfort level than a month ago."

The Standard & Poor's 500 index rose 2.2% last quarter after soaring 14.9% in the second quarter. The technology-heavy Nasdaq composite jumped 10.1% in the third period, atop a 21% second-quarter advance.

The market's surge this year has left the typical U.S. stock mutual fund owner comfortably in the black. As of Friday the average stock fund was up 17.7% since Jan. 1, according to fund tracker Morningstar Inc.

Unless the gains evaporate between now and year's end, this will be the first winning year for many stock investors since 1999.

But conviction about the economy's turnaround, the major force behind Wall Street's rally since mid-March, ebbed markedly in late September.

Fresh data reported Tuesday added to concerns: The Conference Board said U.S. consumer confidence tumbled last month, and a report on Chicago-area manufacturing activity was much weaker than expected.

Other reports in recent weeks also have suggested that the economy was losing momentum, though few analysts believe that business and consumer spending are in danger of stalling out.

Doubts about the economy also have been reflected in a new flood of money into Treasury bonds, driving yields to their lowest levels in more than two months. Buyers rushing to lock in returns pushed the yield on the benchmark 10-year Treasury note down to 3.94% on Tuesday from 4.08% on Monday.

The sudden hunger for Treasuries follows a summer of heavy selling that sent the yield on the 10-year T-note to a one-year high of 4.6% by Sept. 2, up from a generational low of 3.11% on June 13.

"There are some bond-market folks who are pessimistic on the economy, and they're enjoying this," said Peter Hooper, chief U.S. economist at Deutsche Bank in New York.

Yet some Wall Street pros say the pullback in the stock market probably amounts to nothing more than an overdue "correction" after the hefty gains of spring and summer.

September historically has been the market's weakest month of the year, and it once again lived up to its reputation: The Dow lost 1.5% last month and is down 4% from the 14-month closing high of 9,659.13 on Sept. 18.

The S&P 500 fell 1.2% in September and the Nasdaq composite lost 1.3%. They are down 4.2% and 6.4%, respectively, from their recent peaks, also reached Sept. 18.

In a typical correction within a bull market, key indexes can decline 10% to 15% from their highs, analysts note -- which means investors should be prepared for more losses, they say.

The most speculative stocks may be in the greatest danger because they have been the biggest winners this year.

The Interactive Week Internet index, which tracks 45 stocks in that sector, has tumbled 7.9% since it reached an 18-month high Sept. 18. It's still up 44% this year.

The Russell 2,000 index of smaller stocks has declined 6.3% since Sept. 18, though it still is up 27.3% this year.

Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. in New York, said the pullback in Internet shares and other technology issues may be signaling that investors were losing their willingness to pay "ridiculous valuations" for high-risk shares. But that would be healthy for the market as a whole, she said.

Among higher-quality stocks, many optimists say that strong corporate earnings growth should underpin share prices and keep any additional selling from snowballing.

Earnings tracker Thomson First Call in Boston says analysts are projecting that the average blue-chip company will post a 16% gain in third-quarter operating profit compared with a year earlier. Fourth-quarter profit growth is projected at 21.5%, Thomson said.

What's more, the falling dollar could boost U.S. exporters' sales and earnings into 2004, experts say.

Yet so far, a fatter corporate bottom line isn't translating into U.S. job growth. The economy has continued to show a net decline in jobs in recent months, and that increasingly is troubling investors, Keating said.

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