Investors fret over interest rates, high oil prices, China's economy
May 11, 2004
BY SUSAN TOMPOR FREE PRESS COLUMNIST
Wall Street dug up a bunch of reasons to hit the panic button Monday and to drive the Dow below the 10,000 mark for the first time since last December.
The Dow Jones Industrial Average closed at 9990.02, down 127.32 points.
Fear is in every corner -- fear of rapidly rising interest rates, fear of higher oil prices, fear of more troubling pictures out of Iraq, and oddly it would seem, a fear that the Chinese economy could stumble and U.S. companies would lose a promising market for growth.
^^^^^^ CB: And , of course, fear of all those new jobs pressuring wages up. See below
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"You've got a lot of nervous investors out there," said Jeffrey Petherick, portfolio manager and partner for NorthPointe Capital, a money management firm in Troy.
Some call them overly nervous investors. Take the worries about interest rates. Some fears were set off Friday by a good jobs report.
Main Street is thrilled that the jobless recovery has ended. But now Wall Street is sweating up a storm on the thought that the Federal Reserve could be forced to dramatically push up short-term interest rates.
The fearful thinking now is that the Fed could start raising short-term rates as soon as June -- and keep on raising rates at every meeting for the next year or more.
"For the stock market in the near term, it's interest rates, interest rates, interest rates," said David Sowerby, portfolio manager for Loomis, Sayles & Co. in Bloomfield Hills.
It's hard to believe, but just six months or so ago, Wall Street traders had fretted that the economic recovery would be a dud. Then, few on Wall Street even imagined that rates would need to move significantly higher.
But gradually, corporate earnings and the economy gained some strength. So did stock prices. The Dow closed at 10,737.70 points on Feb. 11.
And then, as if by magic, Wall Street began realizing that interest rates couldn't remain at 46-year lows for, say, a decade. Higher rates would be inevitable as the economy gained strength and the jobs picture improved.
Since Feb. 11, the Dow has lost nearly 7 percent.
Long-term interest rates have already climbed.
Bond traders have pushed up long-term interest rates significantly in the past month or so. The yield on the 10-year Treasury bond has climbed to nearly 4.8 percent from less than 4 percent.
"That's a very, very sharp increase in interest rates," said Hugh Johnson, chief investment officer for First Albany Capital, an institutional brokerage in Albany, N.Y.
But many economists say Wall Street may be too gloomy. They don't think that the Fed will need to drive up rates as quickly, as the bond market might suggest.
"The Federal Reserve refuses to jackknife the economy," said Diane Swonk, chief economist for Bank One in Chicago.
Swonk predicts the federal funds rate -- the rate banks charge each other for overnight loans -- to hit 1.5 percent by the end of this year.
By the end of 2005, she says, the fed funds rate would be at 3.25 percent.
A key point to understand, though, is that short-term interest rates are at 46-year lows. So they have to climb up from this point anyway. A fed funds rate of about 4 percent is considered to be neutral -- and not restrictive to economic growth.
Other market watchers agree and say they don't think stock prices should fall much further. And market watchers say there's reason to believe that corporate earnings will remain strong.
"The rate rise is not helpful. But the earnings outlook is great right now," said Mark Sellers, equity strategist for Morningstar Inc. in Chicago.
Yes, there are plenty of factors beyond our control.
China, which is trying to cool off its rapid-boil economic growth, could miss the mark and slow things down way too much. Terrorists could hit. And prices at the pump could stay high for longer than drivers would like.
But overall, many market watchers say Wall Street's fears on Monday were overblown. They say the Dow should not reach the point of flirting with 9000 or 8000.
Contact SUSAN TOMPOR at 313-222-8876 or tompor at freepress.com.