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Shares Drop on Weak Employment Report

The New York Times
August 7, 2004

tocks fell sharply yesterday, setting new lows for the year, after a surprisingly weak July jobs report heightened concerns about a slowdown in economic growth. The dollar dropped and bond prices shot sharply higher, pushing yields to their lowest since the spring.

The stock declines were across the board with only a few sectors avoiding the plunge. Each time stocks appeared as if they would bounce back, more selling sent them tumbling again, leaving all three market gauges near their lows for the day at the closing bell. Each dropped 1.5 percent or more.

The Standard & Poor's 500-stock index is now off 4.3 percent for the year and is at its lowest level since December. The Nasdaq composite index, which includes many technology stocks, is down 11.3 percent and is at its lowest since August of last year. The Dow Jones industrial average is down 6.1 percent for the year and is at its lowest close since November.

The market has been stuck below its 2004 highs since February despite 25 percent growth in corporate earnings in the first and second quarters, in part because some executives have been very cautious about their outlooks recently. Investors also seem more wary. There have been net outflows from stock mutual funds in three of the last four weeks, according to AMG Data Services.

The slower growth implied in the jobs data led some investors to shift their views of how high Fed policy makers might raise interest rates this year. While a quarter-point increase in the benchmark rate, to 1.5 percent, is still expected when policy makers meet on Tuesday, the odds for another increase in September have declined, according to activity in the futures market yesterday.

There also may have been an important political twist in the stock market's decline. Stocks of companies whose earnings would suffer if economic growth slowed fell as expected. But one of the defensive sectors often sought out in a weak economy - pharmaceutical companies - also fell.

"A lot of people are saying that as the job situation goes, so goes the election," said Michelle Clayman, chief investment officer at New Amsterdam Partners. "And they say that if Kerry becomes president, he will be tougher on the pharmaceutical industry than Bush would be."

While stocks sagged, the bond market rallied as investors ignored the effect of the high price of oil on inflation and focused on its drag on consumer spending. In New York, crude oil for September delivery fell 46 cents, or 1 percent, to $43.95, after reaching a record of $44.41 on Thursday.

"So far $45 oil has served to depress inflation expectations because oil has slowed the economy down," said Louis Crandall, chief economist at Wrightson ICAP.

The drop in interest rates that came with the bond rally, with the yield on the 10-year Treasury note falling to 4.22 percent, was the one bright spot on the day. If it holds, it could spur more mortgage refinancing and, in turn, more consumer spending.

The stubbornly high price of crude oil and the decline across the board in industrial production, housing, retail sales and consumer spending in June had already put investors on guard about slowing economic growth. The increased threat of terrorist attacks in the last week intensified a fear that has been on the mind of investors and corporate executives since the Sept. 11 attacks.

"Corporate chieftains are telling me that they are scared about the terrorist threat and it is weighing on hiring decisions and it is weighing on business investment decisions," said Richard Yamarone, director of economic research at Argus Research.

The July jobs report was supposed to be a cure-all, at least for the economic worries, with forecasts for the creation of 240,000 jobs, after a weak 112,000 in June. But the actual number was even weaker than the June report, with only 32,000 jobs created in July, the lowest total since 8,000 in December.

"We thought the weakness was a blip, but it wasn't," said David Hegarty, head of United States equity trading at Commerzbank Securities. "The whole move today is all jobs."

While the jobs report raised doubts about whether American consumers would continue to spend enough to keep the economy moving at even a moderate 3 percent pace, other signs showed that the economy still had momentum, even if not as much as hoped. Manufacturing and service industry indexes rose in July and retail sales for last month, based on auto sales numbers already released, are expected to bounce back from a 1.1 percent decline in June.

Mickey D. Levy, chief economist at Bank of America, said the 3.5 percent growth in inflation-adjusted personal income in the past year through June is "more than enough to fuel continued growth in consumption." While his forecast of 3.5 percent growth in the second half of the year is a little weaker than the consensus, he said the new jobs data would not force him to trim his outlook.

But he said that the jobs report, "taken at its face value, suggests that businesses are on edge" because of oil prices and the terrorist threat and showed they were able to cut back quickly in response to the decline in consumer demand in June.

David Greenlaw, chief United States fixed-income economist at Morgan Stanley, said that if the growth in jobs slowed even more, "the consumer will ultimately be forced to throw in the towel."

For the day, the S.& P. 500 dropped 16.73 points, or 1.6 percent, to 1,063.97 and was down 3.4 percent for the week. The Nasdaq fell 44.74 points, or 2.5 percent, to 1,776.89, and was down 5.9 percent for the week. The Dow Jones industrials dropped 147.70 points, or 1.5 percent, to 9,815.33.

Economically sensitive stocks, led by Caterpillar and Ford, dropped 2.53 percent, according to Morgan Stanley's cyclical index. The S.& P. 500's pharmaceutical sector, led by Pfizer and Merck, fell 1.1 percent. In a reflection of the thought that slower growth will mean lower home mortgage rates, the S.& P. 500's homebuilding sector rose 1.1 percent.

In the Treasury market, the price of the 10-year note jumped 113/32, to 1047/32, as the yield, which moves in the opposite direction, plunged to 4.22 percent from 4.39 percent on Thursday.

The dollar, hurt by slower growth and falling interest rates, dropped 1.8 percent against the euro, leaving one euro worth $1.2277, and 1.2 percent against the Japanese yen, to 110.36.

The question for investors is whether most of the bad economic news is in the market now.

"Barring a terrible geopolitical event, there is not a lot of downside for the market," said Ms. Clayman of New Amsterdam Partners.

Mr. Hegarty of Commerzbank, agreed, although he said he had not yet seen signs of bottom fishing for beaten-down stocks.


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