Sorting through Wall Street's lowered expectations

John Puchalla, senior economist at Moody's Investor Service in New York, sees the "underlying pace" in economic activity as still improving. But he is concerned that if the slide in the stock market again picked up, it could prevent a recovery in capital spending and weaken consumer confidence enough to slow household spending.

"It is a major risk, but not one that cannot be overcome," he says. Interest rates remain low, helping housing, notes Mr. Puchalla. The weaker dollar should stimulate US exports. Fiscal policy is stimulative.

Economists at Goldman Sachs see the bear market having "significant consequences" for the real economy in three key ways.

• It will prompt people to raise their personal savings rate, and thereby slow their spending.

• Because corporate pensions funds invested in financial stocks and bonds are not growing as handsomely as they did in the 1990s, companies will have to contribute more money to these funds, hitting earnings. Most companies have been counting on 8 to 11 percent annual returns on these pensions funds. They may get only about 6 percent.

• Because governments tax stock-market-related proceeds, such as capital gains and stock-option profits, they will have less revenues. State and local governments will especially cut spending because of their need to balance budgets.

Has the bottom been reached and is it time to get back in?

Many Wall Street analysts are reluctant to make that guess.

Mr. Baker suggests, "Wait and see if it falls further. There is not a big rush. I wouldn't worry about missing the train."

But he does find encouraging that stocks are "no longer hugely overvalued. The market is at a level which makes sense." But prices still could fall further.

"Investors need patience and courage," holds Alan Skrainka, chief market strategist with Edward Jones, a major brokerage firm based in St. Louis. "Patience, because this stormy market is not going to last forever. Courage, because bear markets grind away at investors' confidence and generate a lot of fear."

He figures the economy remains in a solid recovery and that the current quarter will be the "last awful quarter" for corporate earnings.

In his testimony to Congress July 16, Mr. Greenspan noted that profits as measured by the Department of Commerce in its national accounts "have increased sharply since the third quarter of last year, partly reflecting the dramatic jump in productivity and decline in unit costs." He also pointed to the revelations of misleading accounting practices at some firms, raising investor skepticism.

CEOs and chief financial officers in 1,000 companies are mandated by the Securities and Exchange Commission to attest to the accuracy and honesty of their companies' most recent financial statements by August 14. Analysts suspect some downward revisions in earnings will occur.

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