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Investors Could Use Summer Break

Sat Aug 7, 2004
By Kenneth Barry

NEW YORK (Reuters) - As if things weren't bad enough for stock market investors in July, they've gotten even worse in August.

In the early days of the month, the gloom has deepened on Wall Street. Oil prices have spiked to record highs near $45 a barrel, the economy is showing signs of slowing and the government warned that U.S. financial bastions have been targeted for bomb attacks.

In the latest blow, the number of new jobs added by U.S. employers in July was shockingly low at 32,000, far below the expected 200,000-plus. That means that employment growth so vital to the economy's recovery -- and rising corporate profits -- remains elusive.

Analysts are warning investors to remain cautious and look for solid, dividend-paying stocks if they invest at all in this difficult environment.

"Our tactical advice until the air clears is to stay out," said Allen Sinai, chief global economist for Decision Economics Inc.

The Federal Reserve, which meets Tuesday to decide interest rate policy, could provide some help for the market at its meeting if it makes clear what may be coming next. It's also expected to boost rates by one-quarter percentage point.

"The stock market is already struggling. The last thing it needs is the Fed raising rates," said Robert Brusca, chief economist at Fact and Opinion Economics.

Last month, the Standard & Poor's 500 fell 3.4 percent for the index's biggest monthly decline in 1 1/2 years. The Dow Jones industrial average is down 3 percent so far this year.


The U.S. central bank has all but committed itself to carry out a series of increases to lift interest rates from 46-year lows. Officials say higher rates are needed as a precaution against harmful inflation.

Fed Chairman Alan Greenspan has called the weakness a "soft patch" and says the economy will snap back. With his upbeat view, he's expected to go ahead with the second 25-basis point increase of the summer.

But there are signs the Fed has been overly optimistic. In a report released in the latest week, personal spending suffered its biggest plunge in more than 2 1/2 years for June. The weak job data could point to further spending weakness and that could take away a major catalyst for stocks to rise.
The recent economic indicators suggest more than just the temporary glitch that Greenspan expects. Some economists say they raise the possibility of a second-half slowdown.

"I am worried that the soft spot is a sign that the whole fruit may go bad," said Brusca.

The tight race for the White House between President Bush and his Democratic challenger, Sen. John Kerry of Massachusetts, has left investors nervous, as has the possibility of another attack on U.S. soil.

"There are so many uncertainties, people are kind of overwhelmed," Philip Dow, director of equity strategy at RBC Dain Rauscher, said.


In what should be a source of strength for stocks, companies' earnings have been exceptionally strong, helping make stock valuations more attractive. Still, investors are skittish, experts said.

"Earnings have been spectacular while share prices have not been going anywhere, so price/earnings ratios are coming down," said Sinai.

"It is looking better from the point of view of looking for bargains," he said.

But investors fear sky-high oil prices will hurt consumer spending further and threaten corporate profits by raising businesses' costs.

Benchmark U.S. light crude oil hit a 21-year high above $44 a barrel this week on fears of possible disruption to tight supply amid strong global demand.

Besides raising businesses' costs of production and transportation, higher energy prices drain away consumer spending from areas such as retail, travel and nonessential goods.

Sinai recommended staying in cash or such defensive stocks as consumer staples, drugs and health care. He also advises being overweight in energy. Oil prices have risen by more than one-third this year, and the trend of high energy prices is likely to continue, he said.

Dain Rauscher's Dow said the market should perk up later in the year when he expects businesses to start spending again, including returning cash to investors in the form of dividends.

"The lion's share of stock market returns have been in dividends," Dow said.








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