It's hard to contemplate, given the market's recent wildness, but the dog days of summer are here. At least it certainly seemed that way Friday and again early Monday as stocks drifted lower in a starkly tight range, relative to recent volatility, and on low volume.

As of 1:39 p.m. EDT the Dow Jones Industrial Average was down 1.35% to 8627.28, the S&P 500 was lower by 1.26% to 897.20, and the Nasdaq Composite was off 0.8% to 1295.36. In NYSE trading, 600 million shares had been exchanged, and just 575 million had traded in over-the-counter activity.

Given last week's big gains for major averages, Monday's losses shouldn't come as a big surprise. Nevertheless, catalysts cited for the weakness included the bankruptcy filing of US Airways ( U) and weakness in Applied Materials ( AMAT) following a critical article in Barron's Sunday and a Prudential Securities estimate cut Monday.

Meanwhile, renewed weakness in Brazil's financial markets ahead of Monday's ongoing debt rollover auction was taking some of the shine off money-center banks like J.P. Morgan ( JPM) and FleetBoston Financial ( FBF).

Oh, and then there's the rising acceptance that the Federal Reserve will not lower rates at Tuesday's policy meeting, a factor that was weighing on the dollar at midday as well as stocks. As of 1:15 p.m. EDT, the dollar index was down 0.7 to 107.72.

Fed fund futures are not pricing in high likelihood of an imminent rate cut, and only one economist at a primary Treasury dealer, Morgan Stanley's chief U.S. economist Richard Berner, is forecasting an ease Tuesday.

"We now believe the Federal Reserve will ease monetary policy at its meeting Tuesday by 50 basis points to insure that emerging economic weakness doesn't turn into a double-dip recession," Berner wrote Friday. "Growing signs of weakness over the past month had increased downside economic risks, but the tipping point was new signs of consumer pullback in July."

Berner conceded the call is a "big change" for him, given his recent optimism about the economy, and a "tough one" for the Fed, given Chairman Greenspan's largely upbeat congressional testimony last month. "If we are wrong and the Fed does not change rates Tuesday, we expect officials to ease by the Sept. 24 FOMC meeting," he wrote. "We believe this double-dip insurance likely will contribute to better growth prospects in 2003, and markets are beginning to price that in. But first, market participants and policymakers will have to navigate the immediate outlook, which looks bumpy."

Taking Growth Lower

Separately, Morgan Stanley's global economist Stephen Roach lowered his growth forecast for the U.S. to 2.3% from 2.9% for 2002 and to 3.1% from 3.8% for 2003. Similarly, he lowered the global growth forecast to 2.5% from 2.8% for 2002 and to 3.4% from 4% for next year.

"Our revised numbers stop well short of building in a double-dip recession, either in the U.S. economy or the world at large," Roach noted. "To the extent such a possibility is still likely -- and that remains my personal preference -- then the risks remain very much on the downside of our weaker global growth scenario."

Roach, of course, has long been forecasting a double-dip recession for the U.S. Earlier in the year he was scoffed at; now his skepticism is taken far more seriously as concerns about the economy now dominate investor sentiment.

Corporate malfeasance issues are "starting to become old news," and few new companies have become embroiled in these issues, said Stephen Massocca, president and head of trading at Pacific Growth Equities in San Francisco. Additionally, the dollar's recent rally has alleviated "fears of a collapse," he continued.

"The only issue still ahead of the markets seems to be the performance of the economy," Massocca suggested. "We believe the markets can continue to rally and trend higher. However, for the markets to truly succeed in the long term, we need the economy to demonstrate that it is indeed healthy and it is doing well."

The optimistic spin on this is that the stock market already anticipated the economy's slowdown with its steep declines in June and July. The pessimistic spin is that stocks are still richly valued given the economy's apparent downward slope, and that there's little the Fed can do to help, and the central bankers probably won't even try this week.
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.

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