Now, a shakier stock market
Anticipating a slowdown, investors are wary of paying high stock prices. Firms lower earnings expectations, too.
Add one more problem for the US economy to surmount: fear and trembling on Wall Street.
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Until this month, the rising value of Americans' stock portfolios had helped ease their concerns about eroding home values. But in October – a month with some bad memories for investors – stock prices, after hitting an all-time high, have started dropping.
Normally, economists discount implications of a falling stock market over a short period of time, since market volatility may not be reflected on Main Street. But this time, there is an aura of concern because the economy is already showing signs of wear and tear. A further drop in the market might adversely affect consumer sentiment leading up to the most important part of the year for retailers.
Some economists say the Federal Reserve, which usually does not react to Wall Street's machinations, may factor in the effect of the falling market when it sets interest-rate policy next week.
"The stock-market decline does pose additional risk to the economy because of the effect on wealth and the loss of confidence," says Lynn Reaser, chief economist at the Bank of America's Investment Strategies Group in Boston. "But the economy has shown significant resilience."
The Dow's fall so far this month is relatively modest – about 373 points or 2.7 percent. But last Friday, the venerable average fell 366.94 points to 13522.02. This is down more than 750 points from its high set on Oct. 11, although the Dow rebounded a bit on Monday with a rise of 44.95 points.
The sharp drop in the average is partly the result of Wall Street beginning to address the downside risk to the economy, says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. "The market is really reflecting a general sense of concern about the economy," he says. "A weaker stock market implies the Fed may be more inclined to cut rates again – not to prop up the market, but to address the forces pushing the market down."
A weaker economy implies lower corporate earnings, which is directly tied to stock prices. The recent stock-market decline reflects the fact that portfolio managers expect lower earnings, says Fred Dickson, chief market strategist for D.A. Davidson & Co. in Lake Oswego, Ore.
"Wall Street is just waking up to the fact the economic climate has slowed down," says Mr. Dickson.
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