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As always, it was the things traders weren't worried about that mattered most this week, during which major averages stumbled while Treasuries soared.

The most-anticipated events heading into the week included Monday's Iraq sovereignty handover (which occurred two days earlier than expected) and Wednesday's

Federal Reserve

policy decision. While fretting about Iraq and Alan Greenspan, most market participants were sanguine about corporate profits, the economy's growth and the downward trend in crude prices. But while the former passed without major upheaval, the latter combined with quarter-end considerations to bite shares on the backside.

Following Friday's modest declines, the

Dow Jones Industrial Average

ended the week down 0.9%, while the

S&P 500

lost 0.8% and the

Nasdaq Composite

shed 0.9%.

Most of the damage occurred Thursday and Friday, after the Fed's widely expected decision to raise rates by 25 basis points. Rather than any disappointment with the Fed, traders said the post-FOMC declines were mainly a function of quarter-end considerations and renewed concerns about the economy's health, along with analyst downgrades of big-cap names such as





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The second quarter was a positive one for equities; the Dow was virtually unchanged but the S&P 500 gained 2.6% and the Nasdaq 2.7%. Fund managers focused on quarterly performance, thus had incentives to keep shares afloat through Wednesday; selling thereafter was likely magnified by the unwinding of such quarter-end window-dressing.

"The last few days

prior to Wednesday, including last week, there was a lot of reallocation of assets," said Scott Curtis, managing director of equity trading at Kinetics, who declined to discuss his firm's positions. "For people who mark up portfolios to show holders they were in the right groups, they sell those positions" after the quarter ended.

The "right" groups included sectors that outperformed in the second quarter, including energy and utilities; conversely, there was selling of poor-performing groups such as precious metals, homebuilders and semiconductors. In addition, there was buying interest in the quarter's best-performing names such as

Research In Motion






"That's pretty much it," Curtis said of the impact of window-dressing. "Now, it's a new quarter

and then we got a couple of days of bad economic numbers."

Indeed, Friday's much weaker-than-expected June employment report -- and downward revisions to May and April payrolls -- capped a string of disappointing reports, save for Monday's personal income/spending data, Tuesday's consumer confidence report and Friday's factory orders report.

In addition to the jobs data, those positives were largely overshadowed by disappointments from the Chicago Purchasing Managers Index, construction spending, initial jobless claims and the ISM manufacturing index.

Heading into the Fed's policy meeting, there was greater discussion about what the central bank would say vs. what it would do. The Fed's

statement that "policy accommodation can be removed at a pace that is likely to be measured," was positive for equities and certainly bullish for Treasuries. The benchmark 10-year note's yield, which moves in opposition to its price, ended Friday at 4.46%, down 18 basis points for the week.

Although the Fed's less-aggressive stance has

bullish connotations on the crucial cost-of-capital front, the aforementioned economic news gave traders pause about the rationale for the Fed's dovish stance.

"The incoming data have taken a turn for the worse, suggesting the FOMC's strategy of gradualism is appropriate," commented Goldman Sachs' U.S. economics team.

Similarly, other events this week refocused investor attention on issues many previously thought were squarely in the bullish camp, notably:

Corporate profits:

As has been widely reported, positive preannouncements have dramatically outpaced negative ones heading into the second-quarter earnings season. But such reports may have lulled traders into a false sense of security, which was undone this week by cautious comments from a slew of companies, including


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General Motors

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and semiconductor assembly outfit

Amkor Technologies

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Oil prices:

After peaking at over $42 a barrel on June 1, crude futures spent the rest of the month in steady retreat, hitting a three-month low under $36 per barrel on June 29. As is often the case, many forecasters extrapolated the downward trend, and some stock bulls were contemplating sub-$30-a-barrel oil by summer's end. Instead, crude futures jumped Thursday after Saudi officials dampened expectations for increased production. Oil settled Friday at $38.74 a barrel, up 3.4% for the week. (Kudos to


Helene Meisler and Merrill Lynch analyst Steve Pfeifer for bucking the conventional view on the direction of crude prices this week.)

The rebound in crude prices was accompanied by a retreating dollar. As is often the case, gold moved in opposition to the greenback, rising $2.30 to $398.70 an ounce Friday as the greenback was "pummeled across the board after a weaker-than-expected June payrolls report further reduces the need for aggressive Fed tightening," commented Ashraf Laidi, chief currency strategist at MG Financial Group. (Still, the yellow metal ended the week down 0.7% after taking a shellacking Tuesday as the dollar surged in anticipation of the Fed's rate hike.)

In addition to the weak payroll headline, average hourly earnings growth slowed to 0.1% from 0.3%, their lowest rate of the year, "quelling concerns of wage inflation" and a more aggressive Fed, Laidi noted.

So at the onset of 2004's second half, Wall Street faces evidence of a slowing economy, which is perversely good for stocks because it means the Fed can remain patient with future tightening. But a cooler economy is simultaneously bad because it suggests flagging job growth, which could hurt consumer spending and possibly lead to President Bush's defeat in November, something most traders are unprepared for.

Aaron L. Task is the assistant managing editor for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to