Despite rebound, stocks fall again

Tuesday, July 16, 2002

Concerns about more corporate scandals and a weakening U.S. economy roiled the world's stock and bond markets Monday.

In what was one of the biggest one-day swings on the U.S. stock market, the blue-chip Dow Jones industrial average was down more than 400 points in the mid-afternoon before staging a powerful rally that left the blue-chip average down only 45 points for the day.

The bounce-back came too late for trading in Europe, where all the leading stock indexes fell by 5 percent or more.

Monday's wild ride in the financial markets, coming after one of their worst weeks since the Sept. 11 terrorist attacks, certainly did nothing to bolster confidence in the faltering U.S. economic recovery.

"The economy will suffer damage from the sick stock market," said Allen Sinai, president of Decision Economics. "This is not like the crash of 1987. This is the worst market for stocks since the 1930s."

May blunt spending

Sinai said the continued decline in stock prices is likely to cause stock-holding consumers to pull back on their spending -- not only because the value of their savings has declined but also because they don't have the trading profits that they once used to pay for vacations, new cars and house improvements.

"The risk to consumption spending from the slide in the stock market is considerable," said Sinai.

At the same time, falling stock prices also raise the cost of capital for businesses, forcing already-jittery executives to rethink what modest plans they might have had for adding new employees and buying new equipment.

"With every 100-point drop in the Dow, the recovery is undermined," said Mark Zandi, chief economist at Economy.com. "If businesses start cutting investments and hiring again, as they did last fall, consumers simply can't carry this economy along. It's time to get concerned."

Another reading of that concern will come today and Wednesday, when Federal Reserve chairman Alan Greenspan travels to Capitol Hill to give his semiannual report on monetary policy to the Senate and House banking committees.

Alan Blinder, a former Fed vice chairman, said Greenspan is likely to try to administer talk therapy to the depressed investors and business executives, carefully balancing his concerns about financial markets and corporate governance issues with his long-term optimism about the American economy.

"It's premature to panic," said Blinder. "But the storm clouds are gathering, and I think everyone, including Greenspan, understands that."

The morning stock sell-off Monday was broad and dramatic, involving companies in nearly every industry and nearly every class of investor.

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