On Wall St., a War of Nerves; Amid Tumult, Some See Buying Opportunities for the Brave
Until Friday, Wall Street seemed to be staging its own version of a patriotic rally. After the Sept. 11 attacks on the World Trade Center and the Pentagon, an already battered stock market went into near free fall. At the market's bottom, 10 days later, the Dow Jones industrial average had tumbled more than 14 percent, the Nasdaq had slumped 16 percent and the Standard & Poor's 500-stock index had dropped nearly 12 percent. But then the market reversed course. By the end of the day Thursday -- one month after the attacks -- both the Nasdaq and the S&P 500 had recouped all of their post-Sept. 11 losses.</br></br>On Friday, the rally took a breather, with most of the major indexes posting modest losses, weighed down by a disappointing report on retail sales and higher-than-expected producer prices. At one point Friday, the Dow plunged 100 points in just a few minutes after the first report of a case of anthrax at NBC News in New York, reaching a loss of more than 200 points. But the Dow clawed its way back late in the day, closing with a loss of just 66 points; the Nasdaq actually closed a little higher Friday.</br></br>The bullish camp theorizes that things have gotten as bad as possible, that there's no place for the market to go but up. The country is, after all, already in a state of war. The economy clearly has fallen into a recession. Earnings will be bad this quarter and next. And the tech sector remains mired in a slump that's now more than a year old. But the markets already have adjusted for all of that.</br></br>On the other hand, the market likes the fact that the early days of the war have gone without a hitch, with no U.S. combat deaths or injuries. Meanwhile, both Congress and the Federal Reserve have shown a determination to prop up the faltering economy. Following two half- point cuts in the past month, the federal funds rate now stands at 2.5 percent, or slightly less than the inflation rate, and there is no reason to think the Fed is finished slashing. Jeffrey Applegate, chief U.S. market strategist at Lehman Brothers, figures we could get down to 1.5 percent to 2 percent short-term rates by sometime next year, the lowest level since the late 1950s. At the same time, Congress is brewing up an incentive package of tax cuts and spending programs that should add further fuel to the economic fire.</br></br>Applegate notes that in every recession since 1950, the market rebounded before the economy did, driven by the combined effects of rate cuts, falling inflation and, in some cases, tax cuts. "The key variable for the stock market is how much stimulus does the market think is in the pipeline," he said. "And the truth is there's a lot, with more to come."