What a Week: The Truth Hurts

Bad news keeps the markets down and the retail investor away from equities.
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SAN FRANCISCO -- A

litany of negatives weighed on stocks this week, and the market proved unable to withstand the strain.

The

Dow Jones Industrial Average

fell 2.4% for the week, while the

S&P 500

lost 3% and the

Nasdaq Composite

shed 3.4%. This was the first week since mid-October in which all three major averages lost ground.

Stocks ended higher Friday thanks to some afternoon gains, but major averages were restrained by a profit warning from

Bristol-Myers Squibb

(BMY) - Get Report

, disappointing results from

Adobe Systems

(ADBE) - Get Report

, concerns about

Calpine's

(CPN)

credit rating, and some mixed economic data.

During the market's run since late September, some observers proclaimed that stocks were rising largely for technical and psychological reasons rather than owing to fundamentals. That view came despite some nascent signs of economic improvement, which re-emerged Friday with a record-setting decrease in business inventories.

The week's inflation data were inconclusive: The producer price index fell 0.6% for November, putting its year-over-year decline at 1.1%. But the core rate, which excludes food and energy, rose 0.2%. Similarly, the consumer price index was flat in November, putting its year-over-year rise at 1.9%. But the core CPI was up 0.4%, its biggest monthly jump in five years. Meanwhile, the Cleveland Fed's median CPI, which is designed to be a purer reading of core inflation, rose 0.3% in November, putting its year-over-year gain at 3.9%.

The bond market remains focused on signs of economic improvement and a possible re-emergence of inflationary pressures; the price of the benchmark 10-year Treasury fell 27/32 to 98 19/32 on Friday, its yield rising to 5.18%.

But the

Federal Reserve

eased for the 11th time this year, declaring inflation subdued and signs of recovery "preliminary and tentative."

Other news lent further credence to the notion stocks had reached beyond what fundamentals could support, including,

earnings disappointments -- notably from

Merck

(MRK) - Get Report

,

American Express

(AXP) - Get Report

and

Ciena

(CIEN) - Get Report

-- layoff announcements and weaker-than-expected retail sales.

Friday's industrial production/capacity utilization data bested expectations, but output dropped for the fourth-straight month and utilization was at its lowest level since May 1983.

Notably, the economic indicators that looked better, such as business inventories, were for October, while reports for November, such as retail sales, looked worse.

While economic activity "virtually ground to a halt" after the Sept. 11 terrorist attacks, the rebound in October was extraordinarily strong, William Dudley, director of U.S. economic research at Goldman Sachs noted midweek. A return to more normal trends "suggests that much of the activity data should downtick in November," he wrote, suggesting comparing November data with August is a "better guide of the underlying trend then data contaminated by the down/up pattern of September and October."

Perhaps the major averages' decline this week reflected investors being unprepared for the economy and for earnings trends to take another dip. Or perhaps their performance stems from a more basic function of supply and demand, as in plenty of the former but little of the latter -- at least from retail investors.

Too Much of a Good Thing?

This was the busiest week for stock issuance -- both IPOs and secondaries -- since July 31, 2000, according to the

Dow Jones

newswire. Led by

Prudential Financial's

(PRU) - Get Report

more than $3 billion offering, IPOs enjoyed their fourth-best week ever, the newswire reported. By my count, a dozen deals were priced this week, raising more than $5.5 billion.

Wall Street uniformly embraces equity offerings, a key source of profits for brokerage firms. But unlike in l999 and early 2000, the supply is not being met by a simultaneous inflow of money into the stock market.

Among others, I believed the eclipsing of Dow 10,000 and Nasdaq 2000 last week might entice individuals, but the retail investor (a.k.a.

the bitter half) continues to avoid the stock market. For the week ended Nov. 12, equity funds sustained outflows of $2.6 billion while money market funds took in $24.1 billion, according to AMG Data.

Year to date, money market funds have taken in $460.5 billion vs. just $17.9 billion for equity funds, according to Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis.

"While institutions have become much more comfortable that the bottom is in place and things are looking better for 2002, they

have

to put investible dollars to work," Belski said. "Retail people are the opposite,

remaining fairly indecisive in the face of rising unemployment and the potential end of the interest rate

easing cycle."

Belski, who deals with institutional clients, surmised that many retail investors suffered a psychological (and financial) blow when purchases made for so-called patriotic reasons in the wake of Sept. 11 turned sour immediately after the market reopened.

Many individuals will rethink their financial planning at year-end and may get more enthusiastic if stocks can hold or extend recent gains, the strategist agreed. But "you need more than the turn of the calendar," he said. "Three months of nice recovery isn't going to make people feel rosy again" after an 18-month bear market.

In other words, retail investors are likely to remain sidelined. This week, Wall Street proved unable to keep both market proxies up and bring new supply to market without participation from the "little guy."

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.