|
By Tom Walker
Atlanta Journal-Constitution
Saturday, March 31st, 2007
A much-anticipated stock market correction finally occurred in the first quarter of 2007, at least temporarily ending a rally that in 2006 gave investors their second-best year in stocks since the heady boom of the 1990s.
Even so, the major stock indexes closed the quarter with small advances thanks to early gains, with only the Dow Jones industrial average ending the period slightly in the red. The Russell 2000 small-stock index was the market leader with a quarterly gain of 1.7 percent.
Friday's trading was mixed on investor reaction to news of the U.S. imposed trade sanctions on China. A government report of stronger-than-expected consumer spending in February was viewed as a negative by traders who saw it as another reason the Federal Reserve won't cut interest rates soon.
As of now, the correction has not reached the 10 percent descent that many strategists expected and still believe will occur eventually. On the basis of closing prices, the Dow fell 5.8 percent from high to low. Based on intraday prices, the index fell 6.7 percent.
The market had risen almost 20 percent from last year's midsummer lows when the Dow Jones industrial average plunged 416 points on Feb. 27, part of a broad global sell-off. Analysts cited a number of causes, including a 9 percent fall in China's principal stock market and a recession warning from former Federal Reserve Chairman Alan Greenspan.
But mainstream strategists generally believed the market had gotten overextended and was due for a correction that could have been triggered by any number of events.
At a more worrisome level, investors were concerned about the outlook for economic growth, persistent signs of inflation, a slowing of corporate profit growth and what impact the nation's weakening housing market would eventually have on consumer spending.
The rise in foreclosures in the subprime sector of the mortgage lending market only deepened investor concerns about the housing outlook, despite assertions from some top government and financial officials that the prime lending market is not in jeopardy.
"The correction in the housing sector could continue until mid-2008 due to rising defaults, tightening credit standards and an oversupply of inventory," said Emily Sanders, president of Sanders Financial Management in Atlanta.
Some strategists are equally concerned about the potential impact of cutbacks in business investment, which could also result in slower growth.
"The weak business spending trend is causing economists to lower their projections for first-quarter GDP [gross domestic product]," SunTrust Robinson Humphrey analyst Gary Tapp said Friday in a message to clients.
"It could come in as low as 1.5 percent," he said. "Our worst-case scenario has been 1.4 percent, and that was based on a serious housing slump with wide-ranging ripple effects. It did not include a simultaneous pause in business spending."
The government said this week that its final GDP estimate for the fourth quarter was 2.5 percent, revised upward from the earlier 2.2 percent estimate.
According to Tapp, weak first-quarter GDP growth "would probably be accompanied by an easing inflation picture, which would create room for the Fed to contemplate easing [interest rates]."
That would be good news on Wall Street, which is almost resigned to the idea that the Fed will not cut its short-term federal funds rate as early in the year as some economists had forecast in December.
"The Fed seems even more torn between worries about growth and fears of inflation," Standard & Poor's chief strategist Sam Stovall said in a message to clients. "We think the Fed's biggest worry is the acceleration in labor costs in recent months."
Even so, Stovall anticipates a Fed rate cut "over the summer." The Fed's overnight rate has been at 5.25 percent since June 2006, where it peaked after two years of steady increases.
Investors will get a better picture of the economy next week with a veritable barrage of reports. The nation's purchasing managers report on March manufacturing and service industries, industry sources release auto sales, and the government reports on factory orders and the important March job growth estimate. Early forecasts call for 130,000 to 150,000 new jobs, compared to 97,000 in February.
Investors and money managers, meanwhile, have shifted their focus in the first quarter to the big blue chips in basic materials and utilities, compared to 2006, when the telecommunications and energy sectors dominated trading.
The first-quarter leaders were construction, oil and gas refining, steel and farm products.
Thrifts and mortgage services were on the losing end, and the S&P home-building index ended the quarter at the very bottom.
Winners in Friday's trading were the Dow Jones industrial average, which closed at 12,354.35 with a gain of 5.60 points, or 0.1 percent, and the Nasdaq composite, which rose 3.76 points, or 0.2 percent, to 2,421.64. The Standard & Poor's 500 fell 1.67 points, or 0.1 percent, to 1,420.86.
Year to date, the Dow is down 0.9 percent, while the S&P 500 is up 0.2 percent, and the Nasdaq composite is up 0.3 percent. For March, the indexes were up 0.7 percent, 1 percent and 0.2 percent, respectively.
HOW GEORGIA STOCKS FARED
Winners and losers among Georgia-based stocks in the first quarter of 2007. The companies are ranked by percent change. Companies with share prices less than$3 are excluded.
|
