Posted on: Sunday, June 6, 2004

Investors face summer of worries

By Adam Shell
USA Today

NEW YORK — Summer has a reputation for being a lazy time on Wall Street. But this year has the potential to pack the excitement of a Hollywood blockbuster.

Investors who had few anxieties to keep them up at night a year ago, are now staring at a long list of worries that could be called: "The Summer of All Fears."

After rising 25 percent last year, the Dow Jones industrials closed at 10,242.82 Friday, down more than 2 percent for the year.

What's different? Uncertainty — which investors abhor — is in greater abundance. Five risks:

• The election. Last year, President Bush, bolstered by "victory" in Iraq, was projected as a landslide winner in the November election. Today, his approval ratings are at all-time lows; his election isn't ensured. Also in jeopardy: his investor-friendly tax cuts.

• Geopolitics. Last year, investors assumed the United States had won the war in Iraq. Today, the war is ongoing. U.S. credibility is under fire because of the prison abuse scandal and the failure to find weapons of mass destruction. Says Greg Valliere, chief political strategist at Charles Schwab, "There's no way to sugarcoat it: More terrorism, kidnappings and executions (in Iraq) are likely, perhaps keeping the markets jittery."

• The economy. Last year, a barrel of crude oil fetched less than $30. Today, the price is hovering around $40. Fear of an oil crisis is rampant, fueling worries that high energy prices will cut corporate profit and consumer spending.

• Interest rates. Last year, there was just talk of rates rising. Today, investors expect the Federal Reserve to raise rates when it meets June 30; it would mark the end of ultra-easy money.

Monetary "tightening has changed the capital market game," Woody Dorsey, president of Market Semiotics argues. "This new net negative tips the balance toward less friendly markets."

• Domestic terror. Last year, terror fears had waned. Now, the government is warning of an attack this summer. Possible targets: July 4 celebrations and Democratic and Republican conventions in Boston and New York.

To confound matters, the market has stalled. The Dow is trading less than 200 points above where it was on March 29, 1999, when it first cracked 10,000.

On the plus side, the U.S. economy is again flexing its muscles and corporate America is awash in profits. Optimists argue that the improving health of U.S. businesses will offset all but the most catastrophic market-moving events.