New York Market: No news is bad news, investors decide

WHEN in doubt, assume the worst. That's the attitude of investors these days. Earnings news has been scant lately, and there hasn't been a major economic report for two weeks. That's left investors to fret that the economy is heating up enough to prompt the Federal Reserve to raise interest rates, offsetting the benefit of rising earnings and spoiling the nice gains in stocks so far this year. In the absence of news, "fears and doubts can dominate," said Stephen Dalton, manager at First Capital Group. "People looked at profits they had [and decided to sell]. "

Last week, the S&P 500 Index lost 2.1 per cent, the Nasdaq 2 per cent, and the Dow Jones 2.5 per cent. Losses were similar among small stocks. Investors endured the choppiest trading in years as the S&P 500 moved more than 1 per cent every day.

The Nasdaq, filled with computer-related companies with high price-earnings ratios, on Tuesday closed at 2,380.90 - down 10 per cent from its record of 2652.05 on 26 April. The S&P 500 now is up 5.9 per cent for the year, while the Dow industrials are up 15 per cent, and the Nasdaq is up 13 per cent.

The biggest declines in the S&P 500 came among metals companies such as Inco and Phelps Dodge and forest-products companies such as Willamette Industries - many of the same stocks that enjoyed the biggest gains in the past few months.

The information void will be filled soon. On Friday, the Labor Department reports on the number of new jobs, the unemployment rate and hourly earnings for May - crucial for determining whether the tight job market will accelerate inflation soon, which could trigger a rise in interest rates. Also, companies that expect to disappoint with their second-quarter profits are likely to begin breaking the news in mid-June. The tone of those announcements will go a long way to determining how the market performs over the summer.

Investors are especially skittish because stocks aren't cheap. The S&P 500 sells for about 25 times the earnings per share expected for the next four quarters. That's the highest it's been in 50 years.

Optimistic analysts say the bull market still gets the benefit of the doubt, because the market's decline last week was accompanied by no significant news. "The long-term health of the US economy is excellent," Abby Joseph Cohen, the Goldman, Sachs strategist, said on Thursday. "It's generating jobs and business and government policies are sensible. Short-term [market] movements are noise."