Pall of gloom on Wall Street

New York: Add one more problem for the US economy to surmount: fear and trembling on Wall Street.

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 this 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 per cent. But Friday a week ago the average fell 366.94 points to 13,522.02. This is down more than 750 points from its high set on October 11, although the Dow rebounded a bit later. 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, Florida.

"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, Oregon. Some companies are already talking about an economic slowdown in their earnings discussions. After posting disappointing earnings earlier this month, heavy equipment and engine-maker Caterpillar said the odds of a recession had moved to 50-50. It said the market for some of its engines was the worst since World War II.

Analysts are already starting to pare down their estimates for holiday spending. Citigroup has estimated that holiday spending would be four per cent higher than last year but that retailers would only see a two per cent same-store increase in sales. This is about one percentage point slower than a normal expanding economy, the bank says.