Riding the economic roller coaster

By Lisa Singhania
Associated Press

NEW YORK — It was a stunning scenario, the founder of Adelphia Communications Corp. and other former executives of the cable television company taken away in handcuffs.

And the images, repeated over and over on TV news channels last week, helped the stock market snap back smartly, reassuring demoralized investors that something is being done to curb corporate abuses.

But market watchers say it likely will be months — if not longer — before faith in stocks is fully restored and Wall Street can enjoy a sustainable recovery.

"There's some visceral satisfaction in seeing these executives being led away in handcuffs, but it doesn't necessarily solve the problem: Are the systemic issues that caused this being addressed?" said Russ Koesterich, U.S. equity strategist for State Street Corp. "Corporate America and chief executives need to restore the sense, to investors, that the numbers they're looking at are robust and vigorous in that they're real. Until that happens, it's going to be difficult."

Prosecution of corporate wrongdoing might cheer some investors, as should legislation designed to curb fraud, but it's equally important that the market start to see a drop-off in the number of scandals being reported.

"The hope is that if good news continues to come consistently, the sentiment of the market will change and that will signal the beginnings of a recovery," said Brian Bruce, director of global investments for PanAgora Asset Management.

So far, that hasn't happened. Last week, for example, Citigroup and J.P. Morgan Chase fell sharply on reports that the banks helped Enron distort its earnings — a contention both companies deny.

Also, AOL Time Warner said the Securities and Exchange Commission was looking at its accounting practices. No charges have been filed, and the media conglomerate stands by its ledgers, but the news was another reminder to investors that the issue of corporate accountability is still a potential spoiler.

Earnings also need to stay solid. Although some sectors have shown improvement in the current batch of second-quarter earnings reports being released, the technology sector continues to struggle.

And there are fears that any downturn in consumer spending, which accounts for two-thirds of the gross national product, could further hamper any recovery. Many analysts believe consumer spending is what has kept the economy afloat in recent months as corporations curb their purchases.

As far as last week's rally is concerned, many other factors were at work, including the fact that stock prices had fallen so sharply, and that buying started to feel a little less risky. The Dow Jones industrials had fallen 840.14 points during the four sessions preceding their 488.95-point gain Wednesday, with similar steep losses in the Nasdaq composite and Standard & Poor's 500 indexes.

"As I've said before," said Todd Clark, head of listed equity trading at Wells Fargo Securities, "I'm still skeptical that the selling is over."