The Hindu Business Line : Have US markets hit the bottom?

A DISCONNECT has emerged between the performance of the US economy and its stock market. True, recent data have been mixed — housing has held up well, jobless claims are trending down, factory orders are up, inflation is benign and consumer confidence has not ebbed, but retail sales and trade deficit aree not encouraging.

Non-farm payroll points to a rather anaemic employment market. While growth in the Q2 2002 is likely to be only about half that in the first quarter, it will still be a respectable 3 per cent or thereabouts.

So what worries Wall Street? Trust (or mistrust) in corporate governance seems to be the culprit. Never have so many accounting shenanigans in Fortune 500 companies exploded at around the same time. And the sums involved are not trivial — each disclosure of falsification runs to several billions of dollars. Are what investors have been seeing all these years purely phantom profits?

If it is so, stock valuations look horribly high and a considerable derating of prices is on the cards. The extraordinary part of the story is that the accounting firms certifying the accounts did not object or bring to light the misdeeds of these symbols of corporate America — Enron, WorldCom, Xerox, Merck, etc. A crisis of confidence has enveloped investors — if we cannot trust auditors, whom can we?

There is a creeping (if not growing) feeling that only the health of the US stock market will determine the well-being of US and the rest of the world. Thus the erosion of investor confidence in companies is extremely ominous.

The US Federal Reserve and its Chairman, Mr Alan Greenspan are very cognizant of this. With a recovery somewhat in place, at other times this would have hardened interest rates. This time, the Fed did not dare to even think of raising rates — so did the ECB and the Bank of England. Such is the fear of falling markets and currency volatility that no one wants to take the slightest chance of destabilising them further and invite an acute crisis.

Investment guru, Mr Warren Buffett, thinks that we are about to see an inversion — just as the market was much ahead of economic growth in the nineties, it will lag the real economy in the coming years. Not good news. Japan's experience does not even bear thinking about — its bubble of the eighties collapsed in the following years leaving the Nikkei at one-fourth its peak.

Few, in fact, realise that this has already happened to the Nasdaq, which at 1,400 levels is less then 30 per cent of its all-time high of 5,000.

For the Dow, 9,000 looks like an inflexion point. A decisive break through this figure on the downside would be very bad news.

If the Dow is supported at 9,000, given time and a gradual restoration of investor confidence, the market should move up. The determination of the Fed to keep rates low till it is certain that we are over the hump improves the odds in favour of a market recovery.

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