The inevitability of war conspired with weak economic data and lousy corporate results to push financial markets close to the abyss several times this week. But shares stubbornly refused to take the plunge and retest the October lows, evidence of either bullish resistance to bad news or dangerous complacency, depending on one's perspective.
Major averages ended the week in arrears -- the
Dow Jones Industrial Average
down 1.9%, the
down 1.5% and the
off 2.4% -- and the Dow hit five-month lows on Thursday. Hardcore bears could take some solace in those results, but the declines arguably could have been much worse, given the news backdrop.
Yes, there were positive developments, such as Friday's reported arrests of Osama bin Laden's sons and the capture of al Qaeda operations chief Khalid Sheikh Mohammed last weekend. But the overriding tone of events was negative.
On the geopolitical front, President Bush made it very clear Thursday evening "this is the last phase of diplomacy" and that the U.S. would attack Iraq without international backing, if necessary. "If we need to act, we will act, and we don't need the United Nations to do so," he said.
Bush also clearly stated the U.S. will seek a second U.N. resolution authorizing the use of force, something France, Germany and Russia earlier declared they will not support. Separately, China said it saw no reason for military action at this time.
Fissures among the U.N. Security Council's permanent members deepened Friday as France summarily rejected a proposal by Great Britain that Saddam Hussein be given a March 17 deadline to disarm. That diplomatic parry followed a report from chief weapons inspector Hans Blix, who said there has been an "acceleration" of cooperation by Iraq but not full compliance. Blix also said inspectors need months to finish their job, time they're highly unlikely to get.
U.S. Secretary of State Colin Powell replied to Blix's report by saying: "Iraq is still refusing to do what is called for by Resolution 1441 -- immediate, active and unconditional cooperation" and that Saddam Hussein has not made "the strategic decision"to disarm, in part repeating what he said earlier in the week.
Friday's U.N. Security Council meeting capped a week of high drama on the diplomatic front, including a surprise decision by Turkey's parliament to refuse U.S. military access to its soil.
The week ended with the fast-approaching inevitability of U.S.-led action against Iraq, most likely without the backing of the U.N.
Given all that (and more) to absorb, it's not surprising that trading volumes remained subdued this week as many investors chose to wait for final resolution or, at least, clarity. Perhaps more surprising is that fewer participants chose to sell. On Friday, the Dow and S&P each closed up 0.8%, while the Comp gained 0.2%.
Looking Beyond, Not Below
In addition to geopolitics, Friday's session saw traders largely look past a much weaker-than-expected employment report for February, including the largest decline in nonfarm payrolls since November 2001. The jobs data heightened talk about potential for another
ease, something discussed
here several weeks ago.
There was also a disappointing midquarter update from
, which fell 3.5% and contributed to the Comp's relative weakness. Intel also capped a string of disappointing results and/or warnings from major companies this week, including:
Pepsi Bottling Group
Wednesday's session, when shares rallied despite a steep drop in the dollar, Friday's performance was remarkably strong, given the news. (The Dollar Index fell 1.8% on the week, closing Friday at its lowest level since October 1999.)
Perhaps traders saw positive aspects of the U.S.' hard-nosed policies, or just the prospect of war itself. Buying, or refusing to sell, in anticipation of war reflects a continued belief that the U.S. economy will rebound sharply, and stocks will rally dramatically as soon the "uncertainty" about war is removed; that's despite
myriad differences between today and 1991.
"Unless you are expecting a major bull market to come storming back in a rapid rise such as the climbs in July and October last year, there just doesn't seem overwhelming evidence for investors to be putting a ton of cash to work at current levels," commented Rick Bensignor, chief technical analyst at Morgan Stanley. "Almost every major trend-following model still points to the ongoing existence of the bear market, meaning rallies are meant to be sold."
Nevertheless, Bensignor also noted "key benchmark indices are close to getting potential buy signals" and the Nasdaq has already gotten one, based on Tom DeMark's Sequential Indicator, a market-timing indicator.
Other factors cited by bulls to support a possible rally in shares include another drop in Treasury yields, including a 48-year low in five-year yields on Friday. The benchmark 10-year note closed Friday yielding 3.62%, just above its all-time low of 3.57% and down seven basis points for the week.
"Either credit markets are understating the risk of a recession or the Treasury market is overstating it," commented Paddy Jilek, chief investment officer at Credit Suisse First Boston. "At this stage, we are giving more weight to the message implicit in credit markets."
Jilek referred to a narrowing of spreads between corporate bond and Treasury yields, which implies less risk of bankruptcies and improving performance by corporate issuers.
In sum, the week amounted to a search for reasons to buy stocks and for short-sellers to cover positions, including rumors of Bin Laden's capture, notwithstanding widespread evidence to the contrary.
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.