Stock market's swoon starting to weigh heavily on portfolios

By LISA SINGHANIA

Associated Press

NEW YORK -- Wall Street had hoped for a rally this summer -- instead it got a full-scale retreat.

Eight weeks of selling have sent the Nasdaq composite and Standard & Poor's 500 indexes to their lowest levels in five years. Even the venerable Dow Jones industrials have suffered, recording six triple-digit losses since the beginning of the month.

The Dow appeared well on its way to another disastrous finish Monday as it plunged 439 points during early trading. It rallied to a 45-point decline -- a dramatic rebound but still not enough to persuade some buyers.

The stunning declines reflect a growing sense of despondency among investors beleaguered by selloffs and mistrustful after months of accounting scandals. They find no reason to buy stocks -- not even a recovering economy or improving corporate earnings can motivate them.

"Last week, I said several times, 'What would make anyone want to invest in the market these days? They might as well go out and buy houses ... or gamble and go to Las Vegas,"' said Steve Fletcher, 58, of Cleveland, who once hoped to retire early.

"I can't really tell what's going on any more," he said. "For all I know, maybe the Dow's going to fall to 6,000."

That sense of insecurity may be feeding the stock market's decline in a way it didn't during downturns in the late 1980s and early '90s, and that in turn intensifies the market's malaise.

A new study by the Pew Research Center suggests the stock market is having its biggest influence in two decades on the way Americans view their own personal financial prospects.

In large part, that's because a growing number of Americans are counting on 401(k) or other investment accounts to fund their retirements. Increased media coverage of the markets is another factor.

"Through most of the 20-year period we looked at, there wasn't much of a link. The Dow went up or down, and people didn't pay much attention," said Scott Keeter, the center's associate director. "Starting since about 1998, people have been paying more attention to the market as an indicator of what the economy is going to do."

That kind of cycle can help drive a market up when optimism is strong but, investor confidence is currently at the lowest point many market observers and financial planners say they can remember. After two years of steep losses, many would-be buyers have simply lost faith that their investments will hold value -- let alone improve -- anytime soon.

"Some people are calling up and telling us they want to go to cash, to go to the sidelines," said Jeff Land, a Charles Schwab investment consultant in Detroit. "That's not our recommendation. But in this kind of a market, a lot of clients are feeling panicked."

Accounting scandals at companies ranging from Enron Corp. to WorldCom Inc. have been blamed for much of the selling. But analysts say the selloffs also reflect the fact that investors, who had once hoped for a resumption of the bull market of the '90s, are lowering their expectations.

Consensus is growing that many companies' profits will be anemic at best over the next few years. That's because the economy appears to be improving slowly -- and some fear that the market's declines will make it even harder for companies to turn a profit. As a result, the beginning of second-quarter reporting season this week is being greeted with anxiety.

"Investors are scared. They're worried about the quality of the numbers," said John Forelli, portfolio manager for Independence Investment LLC.

At the same time, the dollar is losing strength against foreign currencies -- making U.S. stocks less attractive to overseas investors whose enthusiasm for the market has been an important force in its successes.

"A day doesn't go by without a foreign client wondering how to manage this," said Christopher Wolfe, equity market strategist for J.P. Morgan Private Bank, who worries that the worst might not be over. "In the past, I would have been able to believe that this might be what's called a selling climax ... but no longer.

"The low 7,000 level on the Dow is absolutely within range right now, another 1,000 points of overshooting to the downside is not out of the realm of possibility."

That prediction might not be as outlandish as it sounds. Nearly six years ago, when Federal Reserve Chairman Alan Greenspan first expressed concern that "irrational exuberance" was propelling the market too high, the Dow stood at about 6,360. The S&P was at 735, fewer than 200 points below where it is now, while the Nasdaq stood at 1,276, about 100 points below its current position.

Greenspan is scheduled to make his regular semiannual appearance before the Senate Banking Committee on Tuesday. No doubt Wall Street will be listening carefully, but for many investors it will take more than a few words to restore their enthusiasm about investing.

"It really is scary. Intellectually, you do know it's a good time to be buying, but it's hard to," said Cathy Patrick, 47, of Houston, who lost her job in the energy industry five months ago. She's continued to reinvest the dividends in stocks she already own, but hasn't done much else.

"You keep wondering if the economy might not be as good as we think it is, and the market is going to keep falling," she said.