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Investors reckon US already in recession

Markets, key indicators are plunging, reflecting sentiment that outlook appears to be very bleak

NEW YORK – WHILE the chairman of the United States Federal Reserve told Congress on Thursday that a recession could still be averted, Wall Street sent Washington a different message: It is already here.

The Dow Jones Industrial Average plunged 306.95 points to 12,159.21 on Thursday, capping a 14.2 per cent slide from its all-time high in October.

After 12 days of trading, the broader Standard and Poor’s (S&P) 500 Index is off to its worst January on record.

And the Russell 2000 Index, which tracks small companies, sank into a bear market, after falling more than 20 per cent from its year high.

Corrections of this magnitude have coincided with recessions in the past, though not always. In 1990, a steep sell-off presaged a downturn, while a similar drop in 1998 came and went with no apparent effect on the broader economy.

The stock market, however, is not the only part of the financial world that is pointing to trouble.

The Baltic Dry Index, a shipping index considered as a leading indicator of the health of the global economy, has plummeted, and investors have fled high-risk corporate bonds.

A troubling trend is emerging in the S&P 500. Shares of energy and materials companies, last year’s top performers, have fallen to the bottom of the pack.

Investors appear to be betting that those sectors will be hurt by a coming downturn.

The fact that Fed chief Ben Bernanke indicated the need for aggressive interest rate cuts also led investors to believe that the US economic outlook was very bleak.

‘Selling causes more selling. People panic and want to cut their losses,’ said Mr David Kovacs, a quantitative investment strategist at Turner Investment Partners.

Adding to the pessimism, which drowned out the reassurances by Mr Bernanke, were reports that manufacturing activity could be slowing down even more than analysts had expected, and that groundbreakings for new homes last month reached their lowest level in 16 years.

Investors are also worried that write-downs by US banks are making them less willing to lend to consumers and companies, a trend that will cut off a primary source of lifeblood for the US economy.

Mr James Paulsen, a strategist at Wells Capital Management, reflected the view of many investors that help from Washington would come too late to do any good.

‘By the time they actually pass anything, it will be past the time we need it,’ he said.

Some market watchers said the Fed chief was leaning on government support in lieu of aggressively cutting rates.

‘Bernanke said it would be nice to have an economic stimulus package to help him with his fight. You didn’t see Greenspan asking for help,’ Mr Kovacs said, referring to former Fed chief Alan Greenspan.

FEAR IN THE AIR

‘Selling causes more selling. People panic and want to cut their losses.’

MR DAVID KOVACS, a quantitative investment strategist at Turner Investment Partners

Source: The Straits Times 19 Jan 08

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