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The Honolulu Advertiser

Posted on: Sunday, May 27, 2001

Energy costs may slow market recovery

Associated Press

NEW YORK — Stocks have been advancing gradually for the past two months on a combination of interest rate cuts and economic reports that suggest the business climate is improving.

But as summer approaches, potential spoilers exist. Most worrisome are rising energy costs and a continuing murky profit outlook for most companies.

With gasoline prices up as much as 10 percent from a year ago, the fear is that consumers will cut back on other spending.

"Essentially higher energy costs take money out of consumers' pockets that they'd otherwise be spending on autos or other goods," said Matt Brown, head of equity management at Wilmington Trust.

That in turn can hurt retailers and retailing stocks, which have climbed more than 7 percent in the past two months on expectations of a turnaround, according to the Standard & Poor's Retail Index.

"The consumer is two-thirds of the economy," Brown said. "When you look at the big picture, less spending could lead to a slowdown in retailing which can mean layoffs and other problems."

Corporate earnings also are of concern. With the Federal Reserve cutting interest rates five times since the beginning of the year and no signs of imminent economic collapse, most analysts agree that a turnaround will occur. The question is when.

Most recent stock buying has been predicated on the belief that fourth-quarter results will be strong, partly because of the improving economy. Also, year-to-year comparisons should be easier because the fourth quarter of 2000 was weak.

Still, there's been no concrete indication that corporate numbers are strengthening, even in industries where business cycles are considered more predictable.

One example: DuPont, the manufacturer of chemical products, said Wednesday that business conditions are so difficult, it cannot forecast profits for the remainder of the year.

"If we get the sense there's a chance that earnings are not going to turn around until the first or second quarter of next year, then we'll have a downward turn," said Charles Pradilla, chief investment strategist at SG Cowen Securities.

Historically, the markets have been quiet in the summer.

However, Jeff Hirsch, publisher of the Stock Trader's Almanac, predicts a rally sometime in July or early August.

Last summer, stocks rose as investors bought stocks in hopes of cashing in on what was then still a bull market.

A similar catalyst might come this summer if the Fed cuts the interest rate again when it meets in late June. Fed Chairman Alan Greenspan indicated last week that the worst appears over, but further economic weakness might prompt another rate reduction.

Despite the uncertainty, many analysts remain bullish on the market's prospects, although they expect the rally to be uneven.

The Dow Jones industrials have risen 17.2 percent from their lowest close for 2001 — 9,389.48 on March 22 — but the blue-chip index remains 6 percent from the all-time high reached in January 2000.

The Nasdaq composite index has gained 37.3 percent since it lowest close of 2001 — 1,638.80 on April 4 — although it is still 55 percent below its March 2000 peak.

The Standard & Poor's 500 index is up 15.9 percent since its lowest close of 1,103.25, also made April 4, but is 16 percent from its March 2000 high.

Stocks pulled back this past week as expected after the index's recent big gains. Reaction to the news that U.S. Sen. James Jeffords was leaving the Republican Party was muted.

The Dow finished the week down 296.37, or 2.6 percent, at 11,005.37 on a 117.05 loss Friday.

The Nasdaq rose 52.15, or 2.4 percent, for the week. It closed Friday at 2,251.03 after slipping 30.99.

The S&P 500 ended the week down 14.07, a 1.1 percent change, after dropping 15.28 to 1,277.89 Friday.

The Wilshire Associates Equity Index ended the week at $11.849 trillion, down $120.48 billion from the previous week. A year ago, the index was $12.617 trillion.