The end of the month and quarter provided little respite for stocks. In fact, quite the opposite early Monday as stocks tumbled precipitously at the opening bell and were struggling to recover at midday.
As of 2:06 p.m. EDT, the
Dow Jones Industrial Average
was down 1% to 7626.33 after having traded as low as 7460.78, below its July 24 intraday low of 7532.66. Elsewhere, the
was down 1.1% to 818.44 after having traded as low as 800.20, and the
was down 1.6% to 1180.13 vs. its early low of 1160.07.
As stocks struggled, Treasuries flourished. The price of the benchmark 10-year Treasury note was recently up 16/32 to 106 12/32, with the yield falling to 3.60%. Meanwhile, the price of the 2-year note was up 5/32 to 100 10/32, with the yield falling to 1.71%. The 2-year note's yield being below the 1.75% fed-funds rate is an indication that market participants believe the
will lower rates, likely prior to its next scheduled policy meeting on Nov. 6.
But, of course, the fed funds rate has been at 1.75%, a 40-year low, since December 2001. That has prompted consumer spending -- namely on autos and housing -- but has done little to revive business expenditures. Monday's news that personal spending rose just 0.3% in August, vs. 1% in July and expectations for a rise of 0.5%, raised concern the previously profligate U.S. consumer may finally be retrenching. Separately, the Chicago Purchasing Managers survey for September was weaker than expected, showing contraction in the region's manufacturing for the first time since January and signaling no recovery in business spending.
In another sign of the economy's sluggishness,
, the nation's largest retailer, lowered its guidance for September sales growth to 3% from 4%. Separately, shares of
were sharply lower after the drugstore chain reported slightly lower-than-expected earnings and said it would increase promotions for the current quarter.
"Something's wrong with the economy," Dallas Fed President Robert McTeer said in a speech to the National Association for Business Economics this morning, according to wire service reports.
McTeer, who expressed what the financial markets and many of its participants have been saying for some time, was one of two governors who voted for an ease at last week's Federal Open Market Committee meeting.
That's All Right, That's OK
"Repeated shocks to the U.S. economy are delaying the onset of a full-fledged recovery," Bruce Steinberg, chief economist at Merrill Lynch wrote this morning. "Sharp stock market declines and the threat of war are increasing uncertainty, depressing confidence, widening credit spreads and raising oil prices."
Steinberg, who didn't mention the shutdown of West Coast ports due to a labor dispute, lowered his GDP growth estimate for the fourth quarter and first quarter of 2003 to 2.5%. The economist, who now expects the fed funds rate to be at 1.25% at year-end, also lowered his S&P 500 earnings forecast to $45 from $46 for 2002 and to $52 from $55 for 2003.
Nevertheless, Steinberg remains convinced the risks to the economy are event-driven, rather than structural. "There are no deep-seated flaws in the U.S. economy," he wrote, arguing that corporate and household debt servicing is falling and that "any tech bubble is long resolved."
The U.S. is "not turning into a Japan or a Germany, perennially plagued by slow growth because of structural rigidities and bad policy," he continued. The "reality is that interest rates are extremely low, inflation is nonexistent and productivity growth is stupendous. Strong U.S. growth will be the eventual result."
Far be it from me to quibble with as esteemed an economic observer as Mr. Steinberg, but let's take these one at a time:
Corporate and household debt: According to the Fed, the household debt-service burden -- the ratio of debt payments to disposable personal income -- was 14.04% in the second quarter, down from 14.39% in the fourth quarter of 2001, but more than a percent above the average of the mid-to-late 1990s. Falling equity prices and some stabilization -- if not actual decline -- in home prices suggest that level is likely to rise for the third quarter. Corporate debt might be falling, but that's largely because many organizations are no longer able to access the corporate bond market and the default rate is double the long-term average of 1.6%, according to The Wall Street Journal.
The tech bubble has been resolved: Technically, Steinberg is correct. But we're still living with the aftermath of the bubble, namely tremendous overcapacity across a wide number of tech-related industries, which is putting tremendous downward pressure on profit margins of surviving firms.
Structural rigidities and bad policy: Jim Cramer recently provided a rundown of how the obliviousness of the Bush administration's economic policies (or lack thereof) is threatening a number of industries, including telecom, airlines, financial services, and any company facing potential asbestos litigation. I don't always agree with Cramer, but this piece should be required reading for government bureaucrats and optimistic economists everywhere.
Inflation is nonexistent: To be sure, there is little pricing power in many industries (read: tech and telecom), but to argue inflation is "nonexistent" is disingenuous at best. Since Jan. 1, the Bridge/CRB Index is up 18.3%, crude oil is up more than $10, gold is up more than $43.50, and agricultural commodities such as wheat and cocoa are up even more dramatically. Home prices, labor costs and health insurance premiums are also on the rise. The Economic Cycle Research Institute's future inflation gauge had an annual growth rate of 18.8% in August. Meanwhile, the U.S. Dollar Index was down 7.9% year to date heading into today and, of late, was down 0.73 to 107.22 amid a big rally in the Japanese yen.
Productivity growth is stupendous: I can practically hear Bill Fleckenstein's hair standing on end, so I'll quote from his column (which is apropos on many levels): "From 1987 to the present -- i.e., the tenure of the current Fed chairman -- productivity growth has averaged 1.6%. When Mr. William McChesney Martin ran the Fed, from 1951 to 1970, productivity growth averaged 2.6%. So, you can see that contrary to what Steinberg says, productivity growth is not stupendous ... and it is certainly below what we were able to achieve in decades gone by."
Yes, it's easy to make a bearish case right now. But until high-profile economists stop spouting the bullish rhetoric that all our problems stem from worries about war with Iraq and/or corporate accounting scandals, I'll be hard-pressed to believe sentiment is really so negative and thus a positive contrarian indicator.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.