News Analysis: US stock markets remain vulnerable despite the robust economic outlook

The Dow Jones' recent roller-coaster ride showed just how sensitive New York shares are

THE UNITED States economy is heading towards the longest boom in history. Inflation is low, wages are rising at a moderate pace, and every economic forecast says that things are heading in the right direction.

The IMF forecast last week says that America is going to have a soft landing, with no rapid collapse in growth or sudden burst of inflation. So why is the stock market so unhappy?

The fear stems not so much from any concern about new information on the macroeconomy as from a series of interlinked factors that could upset the financial basis for the strong US recovery. The dollar has showed unforeseen weakness against the yen, and the Federal Reserve, having raised interest rates twice this year already, has hinted that it might move them again when it meets next week.

On Tuesday, stocks had a hair-raising ride in New York with the Dow Jones Industrial Average down more than 200 points at one stage only to recover later in the day to end down 27.86. At its lowest, it was just 80 points above the 10,000 mark, through which it so boldly soared earlier in the year to much fanfare. Both the Dow and the S&P 500 were, for much of the day, more than 10 per cent down on their high for the year, the point at which analysts start talking about an official market correction.

Yet the underlying economic figures continue to be positive, after all. The durable goods figures released yesterday showed a continuing strong demand for new aircraft and cars, the fourth month in which orders advanced strongly.

The manufacturing sector is still showing new signs of life. Exports may be picking up as the Asian economies return to strength and Europe stirs. The Conference Board said its register of consumer confidence slipped again in September for the third consecutive month, but it still expects a robust holiday season at stores.

The dollar's weakness against the yen was the subject of intense discussions at last weekend's Group of Seven meetings, and some commitments from Japan did emerge.

The market still fears that the dollar's strength is a thing of the past, despite robust statements from Lawrence Summers, the new US Treasury Secretary. The IMF, in its forecast, projected a dollar decline that would help to correct the trade deficit, even though that decline should be slow and orderly, it said.

In fact, with evidence that the domestic economy is slowing, it seems increasingly unlikely that the Fed will raise rates again when it meets next week. Indeed, some economists believe that the Fed should be moving faster and further.

The Shadow Open Market Committee, a group of private economists, made a rare reappearance on the public stage this week urging more attention to inflation and less on productivity gains.

"They ought to get about their business and stop making excuses as to whether productivity is higher or lower," said Allan Meltzer, a professor at Carnegie Mellon University who is the committee's chairman.

And Fed officials have also been making reassuring comments on other matters.

"I don't think the trade deficit is a problem," said St Louis Federal Reserve president William Poole earlier this week. "So, you should not believe there is any necessary day of reckoning as a consequence of the ongoing trade deficit."

As for Y2K, "Any disruptions or glitches that do occur will be minor and of limited duration," said Federal Reserve Governor Roger Ferguson on Tuesday.

Beyond this, however, the bears who have re-emerged in the past few weeks have pointed out some unhappy facts about the stock market's strength - that buoyancy has for more than a year been concentrated in a few stocks. It is arguable, they say, that Wall Street gave up the ghost in 1998.

Richard McCabe, chief market analyst at Merrill Lynch, says that nearly a quarter of the common stocks on the New York Stock Exchange and Nasdaq are below their lows of last year. A few big stocks have been carrying the apparent boom, and when - as in the past few weeks - confidence slips in them, then the market takes a beating.

So when Microsoft's Steve Ballmer said that technology stocks were massively overvalued and that his own company's stock was too high, it was hardly surprising that technology stocks - especially Microsoft - took a beating.

The mainstream view is that while the stock boom has life left in it, it is likely to be a cautious and steady advance rather than the charges that the Dow has led for the rest of this year.

"Today we think stocks are only modestly undervalued. That suggests to us that stock prices can continue to rise but they will do so in a way that is more commensurate with the actual improvements in our economy, in our corporate profits and the outlook for inflation and interest rates," said Abby Cohen, chief US equity strategist at Goldman Sachs at a seminar on the US economy last weekend.

The returns on stocks will be "good, but not necessarily as fabulous as earlier in the decade".

There are no imminent signs of any event dramatic enough to put the market into sharp reverse; but there are, and have been for a year, plenty of indications that however robust the outlook for the economy, the market was vulnerable.

The pillars upon which the boom was based - weak commodity prices, a strong dollar and lagging markets overseas - have all been put into question.

The massive technological advances of the Internet era are very largely priced into stocks, and then some. Investors seem to be bouncing between taking their profits, and picking up buying opportunities when stocks dip.

Good news, in short, may well be rationed as far as the market is concerned, and the bad news - even if not apocalyptic - may seem more important.

Something like the Taiwan earthquake assumes greater importance in a market like this, and other external factors may well weight the market down. It is likely to be an uncertain drive to the end of the millennium.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consulant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250...

Guru Careers: Financial Controller

£45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Recruitment Genius: Sales Adviser - OTE £24,500

£22500 - £24500 per annum: Recruitment Genius: Inbound and outbound calls with...

Day In a Page

Mullah Omar, creator of the Taliban, is dead... for the fourth time

Mullah Omar, creator of the Taliban, is dead... again

I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

Margaret Attwood on climate change

The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

New Dr Seuss manuscript discovered

What Pet Should I Get? goes on sale this week
Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

The cartoon hedgehog leading the way into a whole new reality

Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
Ants have unique ability to switch between individual and collective action, says study

Secrets of ants' teamwork revealed

The insects have an almost unique ability to switch between individual and collective action
Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

Donovan marks his 50th year in folk

The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

Simulator recreates thrill of F1 circuit

Rory Buckeridge gets behind the wheel and explains how it works
Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

Twitter accused of 'Facebookisation'

Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

Jane Birkin asks Hermès to rename bag

The star was shocked by a Peta investigation into the exotic skins trade
10 best waterproof mascaras

Whatever the weather: 10 best waterproof mascaras

We found lash-enhancing beauties that won’t budge no matter what you throw at them
Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

Diego Costa: I go to war. You come with me...

Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
Ashes 2015: England show the mettle to strike back hard in third Test

England show the mettle to strike back hard in third Test

The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

Charley Hull: 'I know I'm a good golfer but I'm also just a person'

British teen keeps her feet on ground ahead of Women's Open
Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

Our choice is years of Tory rule under Corbyn or a return to a Labour government

Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'