War Clouds Gather Over Stocks - Fog of War Clouds Economic Forecasts
War Clouds Gather Over Stocks Sun February 2, 2003 11:03 AM ET By Elizabeth Lazarowitz
NEW YORK (Reuters) - The winds of war have been buffeting Wall Street, sending skittish investors to the sidelines, and the storm is only likely to intensify this week as the White House makes its last diplomatic push for Iraqi disarmament.
With U.S. forces massing in the Middle East and the rhetoric from Washington heating up, the United States appears increasingly on the brink of war. The suspense has plunged key market gauges to their lowest levels in more than three months.
President Bush has said Baghdad has just weeks left to avert war, and Wall Street will be tuned in for anything that might give clues to a timeline for a possible U.S. attack on Iraq.
"Iraq will be the most important issue (this) week -- period," said Hugh Johnson, chief investment officer at First Albany Asset Management. Ordinarily, investors' focus would be fixed on the outlook for the economy and corporate profits, but "(this) week is just not going to be an ordinary week."
While brewing geopolitical events will likely shove nearly everything else to the back burner, a flood of economic reports -- particularly data on the manufacturing sector and the labor market -- could help determine Wall Street's mood.
The Institute of Supply Management's closely watched gauge of the factory sector, set for release on Monday, and the U.S. payrolls report on Friday will give investors some early glimpses of the state of the economy in January.
Evidence that the U.S. economy is pulling out of its soggy patch has been spotty, at best, and the increasing possibility of war has whipped up fears growth could stumble as corporate America puts off investment decisions and stubbornly high oil prices bite into corporate profits.
The steady parade of corporate earnings will probably also fade into the background somewhat, but Wall Street will be tuned in for results and, more importantly, forecasts from technology bellwether Cisco Systems Inc. CSCO.O and No. 4 U.S. long-distance telephone company Sprint Corp. FON.N
INDEXES DOWN
War worries have helped drive the broad Standard & Poor's 500 index .SPX down about 8 percent from its high for the year hit on Jan. 14 and into negative ground for the year.
Year-to-date, the S&P 500 and the blue-chip Dow Jones industrial average .DJI are both down around 3 percent, and the tech-packed Nasdaq Composite Index .IXIC is down about 1 percent.
All three finished the week lower after the S&P 500 and Dow posted their lowest closes since mid-October and the Nasdaq ended at its worst level since mid-November on Thursday.
Wall Street will be watching on Wednesday when Secretary of State Colin Powell goes before the United Nations Security Council to try to persuade doubters Iraq has weapons of mass destruction. Iraq denies it possesses banned arms.
"That stuff is in the way of the market right now. Nobody's going to want to go long in a big way until this Iraq thing gets cleared up," said Michael Vogelzang, president of Boston Advisors Inc. "It's just going dominate headlines. It's going to dominate investor sentiment."
Bush said on Friday at a joint press conference with British Prime Minister Tony Blair that the United States would resist any attempt to drag out the issue for months, but that he would welcome a second U.N. Security Council resolution if it offers a strong signal to Iraqi leader Saddam Hussein.
Bush believes that a U.N. resolution in November gives authority for military force, but he faces opposition from major powers such as France, Russia and Germany.
Worries that a war could disrupt oil supplies, as well as a 2-month-old strike that has crippled oil production in Venezuela, a major U.S. supplier, have helped push the price of crude oil above $33 a barrel.
Those high prices have sparked fears that corporate profits, already tepid, could take another blow as companies and consumers are forced to shell out more for energy costs.
EARNINGS, ECONOMY STILL UNSTEADY
The fourth-quarter results pouring in from corporate America have been, for the most part, encouraging. About 67 percent of the companies in the S&P 500 have reported earnings so far, and, of those, 62 percent have beaten Wall Street analysts' expectations and 22 percent have matched them, according to Thomson First Call.
What is troubling, however, is that the outlook for corporate profits in the year ahead remains decidedly murky.
"So far, the guidance continues along the lines of no visibility," said Charles White, president of investment firm Avatar Associates. "Companies don't even want to say anymore that they see things getting better in the second half, because that's what they told us last year."
Results are expected this week from technology bellwether Cisco, Sprint, medical device maker Boston Scientific Corp. BSX.N , consumer products company Colgate-Palmolive Co. CL.N , No. 2 U.S. drugstore chain CVS Corp. CVS.N , and No. 1 U.S. home appliance maker Whirlpool Corp. WHR.N .
Beverage and food company PepsiCo Inc. PEP.N and Anheuser-Busch Cos. Inc. BUD.N , the maker of Budweiser beer, also have results on tap.
But with the peak of earnings season now past, the economic picture is becoming increasingly important, analysts said.
The ISM report for January is expected to slip to 53.7 from 55.2 in December, according to economists in a Reuters survey. It would be the third month in a row above the 50 level that separates expansion from contraction, potentially cementing hopes the manufacturing sector is recovering from its slump.
The report on non-farm payrolls will be the economic highlight of the week. Payrolls are seen rising by 70,000 in January after a 101,000 drop in December, while the jobless rate is expect to remain steady at 6.0 percent.
(Wall St Week Ahead appears weekly. Comments or questions on this one can be e-mailed to Elizabeth Lazarowitz, elizabeth.lazarowitz(at)reuters.com)
Fog of War Clouds Economic Forecasts Sun February 2, 2003 11:05 AM ET By Tim Ahmann
WASHINGTON (Reuters) - War jitters are clouding the U.S. economic outlook, making it hard to discern the recovery's underlying state of health and difficult to forecast what will happen when the current uncertainty lifts, economists say.
"What happens this year is sort of anybody's guess," said Martin Baily of the Institute for International Economics.
Like many economists, Baily, who served as a top economic adviser to former President Bill Clinton, believes concerns over the potential damage a war could wreak on the economy has already made businesses reluctant to hire and spend.
But he also said the U.S. recovery is being restrained by more than just concerns over a possible war with Iraq.
"We had an excess of (business) investment, we had a way overvalued stock market and we are still working our way through those things," he said.
In the view of economists at the Wall Street firm Goldman Sachs, war fears take a back seat to a hangover from the bursting of a stock market bubble.
"It simply isn't plausible that households or firms are retrenching because there could be a war halfway around the world, a war in which the United States is expected to prevail quite easily," Goldman Sachs economist Jan Hatzius wrote in a recent note to clients.
In a recent survey, the newsletter Blue Chip Economic Indicators found forecasters, on average, looking for growth of 2.8 percent this year, which would mark a slight pickup from last year's sluggish 2.4 percent.
In general, economists see a weak first half of the year followed by accelerating growth once war clouds pass. But there appears to be an unusually large range of forecasts, in part because of split views over what is holding the economy back.
WEIGHING THE RISKS
In announcing its decision to hold interest rates steady at four-decade lows earlier this week, policymakers at the Federal Reserve gave the war-fears argument a nod.
"Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses," the Fed said in its rate announcement, adding the economy should improve "over time" as risks lift.
Some analysts said the Fed's phraseology of "reportedly" and "over time" suggested policymakers at the central bank see the recovery saddled with more than just war.
Nevertheless, the central bank reiterated its view that economic risks were balanced between weakness and a possible rise in inflation -- a view some analysts see as disingenuous.
"The economy clearly has a downside risk that exceeds any risk of inflation at this juncture," former Fed Governor Wayne Angell said. "They've misled the market a little on the side that the prospects for recovery may be brighter than they actually think they are," he said.
However, some think the economy could show surprising strength if war-related economic risks fade.
"The risks in the near-term are titled to the downside and they are significant," said Rick Egelton, deputy chief economist at BMO Financial Group. "Longer-term, if this (war) cloud is to rise, I think the risks by and large may be on the upside."
Egelton said extremely low interest rates, coupled with the prospect for stimulative tax cuts, suggest the economy could be growing solidly by year-end.
CRYSTAL BALL
Even some economists who question whether the cloud of war is the main factor restraining growth see better days ahead.
"The dynamics are good," Conference Board Chief Economist Gail Fosler said. A pickup in consumer spending in the final month of last year and the extremely low level of inventories held by businesses suggest production is likely to get a boost early this year, Fosler said.
She also thinks businesses will soon need to raise spending on high-tech gear, which has a relatively short useful life.
"You're getting to the end of being able to implement a kind of break and fix strategy with respect to your (information technology) spending," Fosler said.
"There are clearly downside risks but it would be hard to say ... those risks are predominant," she said.
While it may come as no surprise economists are not speaking with one voice, the range of opinions is striking.
However, forecasters do seem to agree on one point, the U.S. economy, while it may look forward to better days, is not yet out of the woods.
"I'm sorry I don't have a better crystal ball for you, but I actually don't think anybody else does either," Baily said.