April 16th, 2005

Fears of slow growth rock stock market
Indexes endure worst day since November election

By Jonathan Fuerbringer, New York Times

NEW YORK — Stocks tumbled on Friday to their lowest levels since the presidential election, extending a recent slump that has come amid fears that economic growth is slowing.

The sell-off on Friday was ignited by surprisingly weak earnings from IBM and steepened throughout the day. It was the worst single day for all the major market indicators this year and capped the worst week since August.

But it may be that general uncertainty — something that the stock market and millions of investors have never warmed to — is the real culprit.

While some economists are now suddenly predicting slower economic growth, others are not. And no one is talking about a slump. Federal Reserve officials have been worried about inflationary pressures, but any economic slowdown may help relieve those.

"Right now it's a no vote on the economic outlook for the next six months," said Joseph Liro, an economist and market analyst with Stone & McCarthy Research Associates. "And that is because of the uncertainty about the impact of oil" on consumer spending, corporate profits and inflation, he said.

The persistence of crude oil prices above $50 a barrel, Liro said, "is certainly doing something to consumer sentiment," which was reflected Friday in a reported decline in consumer confidence for April.

Worries that the economy is softening flared up thisweek after reports showed an unexpected surge in the nation's trade deficit with the rest of the world, and weak monthly retail sales. Many economists have lowered their estimates on how much the economy grew in the first three months of the year and are reviewing their forecasts for the rest of the year.

On Friday, the Dow Jones industrial average closed down 191.24 points, or 1.9 percent, to 10,087.51, and the Nasdaq composite index fell 38.56 points, or 2 percent, to 1,908.15, The Standard & Poor's 500-stock index dropped 19.43 points, or 1.7 percent, to 1,142.62. The slump this week wiped out the big gains for the Nasdaq that came in the post-election rally last year and almost all of the gains for the Dow and S&P 500-stock index.
Investors are more cautious and are avoiding stocks, said Sallie Krawcheck, Citigroup's chief financial officer.

"There's a pulling back that has occurred," she said. "And we're seeing it not just in the U.S. but frankly around the world."

As stocks fell, the bond market rallied as investors there seemed to accept that if the economy was slowing, Federal Reserve policy-makers would probably worry less about inflation and be less aggressive in pushing up interest rates.

The yield on the benchmark 10-year Treasury note fell

to 4.24 percent in late trading, its lowest level in two months. Yields and prices move in opposite directions.

"We are oscillating between worrying about overheating and the Fed jacking up interest rates and, 'My gosh, the consumer is capitulating and the economy is going to slow,'" said James W. Paulsen, chief investment officer at Wells Capital Management. "But if you step back a bit, you see that growth is still good, profits are still good, and job growth, while not stellar, is not bad."

Taking the longer view, however, is not something that investors are likely to do in a year that has already been a big disappointment for equities. For 2005, the Dow is down 6.5 percent, the S&P 500 is down 5.7 percent, and the Nasdaq is down 12.2 percent.

After the stock market closed on Thursday, IBM reported first-quarter earnings of 85 cents a share, missing Wall Street forecasts by a nickel. On Friday, IBM plunged $6.94, or 8.3 percent, to $76.70. Whether or not IBM's problems are a sign of renewed weakness in the technology sector, its plunge dragged down the prices of other technology stocks, including Intel and Microsoft. The S&P's index for the information technology sector was down 3.1 percent.

Stubbornly high oil prices are already hindering growth and will become more of a drag if they remain over $50 a barrel. In trading on the New York Mercantile Exchange on Friday, the price of crude oil for May delivery fell 64 cents, or 1.3 percent, to $50.49 a barrel.
Gasoline prices are also setting new highs, and consumers seem to be feeling the impact and curtailing spending, according to some economists.

The University of Michigan's index of consumer confidence dropped sharply in April to 88.7 from 92.6 in March and is at its lowest level since September 2003.
"Clearly higher fuel prices are having an impact on sentiment," said David J. Greenlaw, chief U.S. States fixed-income economist at Morgan Stanley.

Krawcheck, Citigroup's chief financial officer, cited consumer caution in a conference call on the bank's first-quarter earnings.

"We've seen a consumer through this quarter who's acting very responsibly and very conservatively with their financials," she said. "For example, as I mentioned, they're paying down their credit card debt. They're also acting quite conservatively with regard to the stock market."