NEW YORK, 24 September 2006 — Wall Street’s recent rally has stalled with investor sentiment dented by revived fears about a US economic slowdown, or even a recession, analysts say.
The Dow Jones Industrial Average fell 0.46 percent in the week to Friday to 11,508.10, as the blue-chip index pulled back from a run toward its all-time high of 11,722.98.
The broad-market Standard and Poor’s 500 lost 0.39 percent on the week to 1,314.78 and the tech-laden NASDAQ composite shed 0.75 percent to 2,218.93.
The week started on a positive note and the Dow moved to within 110 points of its record after the Federal Reserve, citing easing inflationary pressures, kept interest rates steady for the second time after 17 consecutive quarter-point increases. But the market turned quickly south on Thursday after being jolted by a sharp drop in a regional Fed bank survey of manufacturing activity.
Marc Pado, analyst at Cantor Fitzgerald, said that “after the Philly Fed, worries have grown” about the possibility of a sharper economic deceleration. “The sharp drop in the Philadelphia Fed index is a warning sign that maybe the economy is slowing more than believed,” said Joel Naroff of Naroff Economic Advisors. “This report is likely to cause a stir in the markets as it gives the impression that the manufacturing is following housing downward.”
In the coming week, Wall Street gets a whiff of how the housing market is faring with Monday’s report on existing home sales. Some fear a weak report could signal big economic troubles. “There is a distinct possibility that the cooling in US housing markets could play out a lot faster than we expect, raising the likelihood of a US recession,” said Steve Chan, economist at TD Bank Financial Group.
“TD Economics currently pegs the odds of such an occurrence at about 25 percent.”
Hugh Johnson at Johnson Illington Advisors said, “It’s very clear that investors are very worried about the direction of the US economy, especially about the housing market. They want to see if it continues to slow at a gradual pace.” Stephen Gallagher, economist at Societe Generale, cites an unusual scenario in which the financial markets — mainly the bond market — are flashing recession signals but other economic data signal healthy growth. Overall, however, he sees economic fundamentals such as healthy corporate profitability as keeping the economy on track.
“Though we cannot exclude the possibility of a shock-driven recession, based on the cyclical force currently at play, a significant slowdown remains unlikely,” Gallagher said.
Although most economists see a “soft landing” for the world’s biggest economy, a number of stock market analysts are urging caution ahead of a season that often is rocky.
“There’s just enough uncertainty in the air to make us cautious about stocks in the near term,” said Philip Orlando at Federated Investments. “The central bank has been trying to navigate a ‘soft landing’ for the economy, and Federated believes they’ll pull it off. But, if we’re wrong, we think the risk is that the economy could slow too much, rather than too little.”
Bond prices surged as investors bet on further economic weakness that may allow the Fed to cut rates early next year. The yield on the 10-year Treasury bond slid to 4.597 percent from 4.798 percent a week earlier, while that on the 30-year bond tumbled to 4.738 percent from 4.919 percent.
