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."