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The Honolulu Advertiser
Posted on: Tuesday, August 6, 2002

Investors fear market may enter 'double-dip' recession

By Adam Shell and Barbara Hagenbaugh
USA Today

Yesterday was another bad day as the Dow fell 270 points, it's third straight triple-digit loss. The Nasdaq closed at 1,206, it's lowest since April 1997.

Associated Press

NEW YORK — Dragged down by another weak economic report, the Dow Jones industrial average yesterday suffered its third consecutive triple-digit loss, a streak that has erased two-thirds of its 1,000-point surge in late July.

Rising fears that the economy may slip back into recession — often called a double dip — is the latest worry to dent investor confidence and is also raising concerns that the Dow's July 23 low of 7,702 was not the ultimate bottom.

"The focus has shifted massively from, 'Oh my God, the whole corporate world is fraudulent' to 'We may have a double dip,' " says Will Braman, chief investment officer for John Hancock funds.

The Dow, which fell 270 points yesterday to 8,044, has lost 693 points the past three sessions. The Nasdaq composite fell 3.4 percent to 1,206 — its lowest close since April 1997.

Slowing growth in the nation's service sector was the latest piece of weaker-than-expected economic data to rattle investors. The Institute for Supply Management said its monthly nonmanufacturing index fell to 53.1 in July — the lowest since January and its second monthly decline in a row.

The persistent weakness in the economy and stocks has prompted speculation that the Federal Reserve will again be forced to slash short-term interest rates, already at 40-year lows. Goldman Sachs expects the fed funds rate, now at 1.75 percent, to be 1 percent by year's end.

"Something has got to happen or the market will just keep going down," said Henry Herrmann, chief investment officer at Waddell & Reed, a mutual fund company. "I'm thinking the Fed has got to help and cut rates, and the market seems to be forcing the issue."

After an unprecedented 11 rate cuts last year, the federal funds rate is now 1.75 percent. This is the interest fee banks charge one another on overnight loans. With such a low federal funds rate already, the Fed doesn't have much ammunition left to stimulate the economy.

"We're at the point where the good news is ignored," says FleetBoston Financial chief economist Wayne Ayers, noting the ISM report contained upbeat news on employment and still suggested the services sector is growing.