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Today's Market WrapUp |
Is it War or is it Profits?
Everything we watch or read today has something to do with the current tensions with Iraq and North Korea and one can’t help but think about the effects that war with Iraq may have in the equity markets. In fact, many of us seem to think that war has already been priced into the markets today. Is that really the case?
As the market tacks on to its 3-year decline the only reasonable explanation, so says the mainstream media, is the war with Iraq, which leaves too much to question. Even today in Greenspan’s testimony in front of the Senate, he stated that he believes the U.S. economy will work its way through the current trough as long as the war or threat of war doesn’t get in its way. War, in his viewpoint, is what is keeping our economy from getting its legs back underneath itself.
His testimony failed to address a battle on another front: earnings growth. There has been no sign that earnings growth has taken solid footing; in fact, just the opposite is true. Earnings growth projections have been constantly revised downward. With or without war with Iraq, corporations are painting a picture of slower days ahead. We have already seen the cuts in capex from companies like Intel and SunMicrosystems, and that was just the beginning as the inventory channels start to back up again. During the last six successive months the forecasts for S&P 500 earnings growth has been reduced. In August, analysts thought earnings for companies in the S&P 500 index would grow at a rate of more than 20% in both the first and second quarters of this year. They thought that kind of growth could continue for a full year. Since then, they have steadfastly cut their expectations, and now are calling for less than 8% growth in the first half of the year and 12% for the full year, according to Thomson First Call data.
War seems to be the excuse for the markets’ weaknesses lately, and in some cases it may fit that billing, but if your were to strip the war out of the equation I think you would still find the economy in a very precarious situation. The equity markets in the U.S. have yet to find their footing and any expectations of this to occur before corporate profits find their footing is misleading.
Financial Markets
The Standard & Poor's 500 Index fell 6.77, or 0.8 percent, to 829.20. The Dow Jones Industrial Average lost 77.00, or 1 percent, to 7843.11. The Nasdaq Composite Index dropped 1.22, or 0.1 percent, to 1295.46. All three benchmarks closed at their lowest since Oct. 10. Almost three stocks fell for every two that rose on the New York Stock Exchange while 10 declined for every nine that advanced on the Nasdaq Stock Market. Some 1.30 billion shares traded on the Big Board, 3 percent below the three-month daily average. Almost 1.32 billion shares changed hands on the Nasdaq by 5:15 p.m. in New York.
April gold futures rose $1 to $364.00, bouncing off its intraday low of $361 following bin Laden's statement. Also, March crude futures shot up $1.02 to fresh contract highs of $35.50. The U.S. dollar's action was similar. It initially rallied to three-week highs versus the euro and two-month highs versus the yen on U.S. economic optimism, but was recently trading down 0.1 percent versus the euro at $1.0744 and down 0.2 percent versus the Japanese yen at 121.01.
Overseas Markets
European stocks rose, lifting the Dow Jones Stoxx 50 Index for the first day in four, after BP Plc posted higher fourth-quarter earnings than analysts expected and companies including Tele2 AB and Valeo SA returned to profit. The Stoxx 50 added 2.2 percent to 2209.17 as of 3:15 p.m. in London. The Stoxx 600 Index rose 2 percent, with banks and insurers accounting for a third of the gain. The Stoxx 50 has shed 7.9 percent this year, and the Stoxx 600 is 7.5 percent lower, amid concern a war with Iraq would stall economic growth.
South Korea's Kospi index fell to a 15-month low, led by Korea Electric Power Corp. and KT Corp., after Moody's Investors Service cut the nation's rating outlook, citing the threat of North Korea's nuclear weapons program. The Kospi dropped for a fifth day, losing 0.2 percent to 575.98, its lowest since Nov. 8, 2001, at the 3 p.m. close in Seoul.
Treasuries
The bond market initially declined following Greenspan's testimony, but bin Laden's new comments triggered a rebound in assets considered to be safe in times of uncertainty. The yield on the 2-year Treasury bond was unchanged at 1.15 percent and the yield on the benchmark 10-year bond was dipped 0.02 percentage points to 3.96 percent.
Copyright © 2003 Scott Middleton
February 11, 2003
Dow chart courtesy of stockcharts.com