NEW YORK, March 7 (Reuters) - Monday marks the third anniversary of the biggest party ever hosted by Wall Street, but investors will pass the day with gloom -- and a sizable dose of bitterness -- as the countdown to war and the erosion of the market continue.
The technology-stuffed Nasdaq composite index (IXIC) soared as high as 5,132.52 on March 10, 2000 -- hitting a level never seen in its roughly 30-year history and not likely to be witnessed again any time soon.
Sentiment took a 180-degree turn the following three years, and next week will highlight the startling shift in mood as the deadline for a war on Iraq looms, the hunt for terror suspects intensifies and economic data paint a dreary picture.
Market watchers say risk-averse investors will steer clear of stocks next week, leading to feather-light volume and more declines after this week's slump in the major market gauges.
"We will see heightening of tensions next week," said John Davidson, president and chief executive officer at PartnerRe Asset Management, which oversees more than $5 billion.
Wall Street will be waiting to see whether the United Nations backs a second resolution that calls for war on Iraq if it fails to disarm. But President George W. Bush has warned he is ready to strike with or without a green light from the U.N.
With war appearing imminent, worries are mounting that a military strike will incite more attacks against the United States and put the economic recovery in danger. Add to that growing tensions with North Korea, and the Nasdaq's record three years ago is just a grim reminder of changing times.
"The bottom line is: The confluence of all these exogenous factors is challenging even for investors who have been in business for decades," said Ned Riley, chief investment strategist at State Street Global Advisors.
ANY RALLY WILL BE BRIEF
The United States, Britain and Spain on Friday delivered a March 17 ultimatum to Iraq to cooperate fully with disarmament demands or face war. Three major nations with U.N. veto power remained opposed to military action. But Bush said on Thursday he was ready to wage war with or without U.N. approval.
March 17 now becomes zero hour before the United States and its allies unleash the more than 300,000 troops committed to the Gulf region. Market watchers say they expect stocks to rally once the bullets fly as a cloud of uncertainty over the market lifts, but they warn gains will be fleeting.
"If the war goes well, it might have some momentum for a while, but that doesn't mean all our worries go away," said Philip Dow, director of equity strategy at RBC Dain Rauscher, explaining that a strike could ignite anti-American sentiment and trigger attacks against the United States.
Stocks enjoyed a brief pop on Friday after a Pakistan official said two sons of Osama bin Laden were possibly arrested in Afghanistan. Other reports threw the arrests into question, but hopes are mounting on Wall Street that the United States is closer to snaring bin Laden. An actual capture of the al Qaeda leader may spark a hefty -- but brief -- rally.
"The sons got about 85 points out of the Dow and we are not even sure which sons they are or if they were captured or not," Riley said. "It would be encouraging if we caught bin Laden in that there has been success in the pursuit of terrorists. But the FBI has stated there are still many out there that could cause problems even if the leader is captured."
North Korea is another hot spot that's sidelining investors. The United States said on Friday North Korea has declared a maritime exclusion zone in the Sea of Japan, signaling it might be planning a missile test and again raising regional tensions.
"You have North Korea staring you in the face when Iraq is over," Dow said.
EARNINGS, DATA TAKE BACK SEAT
The U.N. vote comes during a week with few major corporate earnings and just a handful of key economic reports, leaving investors at the mercy of the fast-changing geopolitical scene.
Corporate earnings from drug maker Bristol-Myers Squibb (NYSE:BMY - News), food manufacturer H.J. Heinz Co. (NYSE:HNZ - News), supermarket chain Kroger Co. (NYSE:KR - News) and software designer Adobe Systems Inc. (NasdaqNM:ADBE - News) may offer a slight distraction. But the rush of fourth-quarter earnings season has passed. Most companies have already confessed to investors that the outlook isn't bright, given the struggling economy and geopolitical tensions.
A government report on retail sales on Thursday isn't expected to paint a rosier picture. Retail sales for February are expected to dip 0.4 percent versus a decline of 0.9 percent in January. Stripping out autos, retail sales are seen down 0.1 percent versus a jump of 1.3 percent in January.
"Retail sales are not going to do well," said Stanley Nabi, managing director at Credit Suisse Asset Management, which oversees $55 billion in North America.
Investors will pay special attention to Thursday's data on weekly jobless claims. The number of Americans lining up for first-time unemployment benefits is expected to total 419,000 in the week ended March 8, compared with 430,000 the previous week.
On Friday, a government report showed the U.S. economy last month suffered its worst drop in jobs since the aftermath of the Sept. 11 attacks.
"The employment report was supposed to be weak, but it was much weaker than expected," Davidson said. "But I think an awful lot more attention is on geopolitical events than economic data. It's already stolen the spotlight."