By Clyde Noel

Stock Report

While most economists believe the United States is heading into a recession, the evidence is there. The stock market suffered its worst week since the Depression, airline layoffs have reached 100,000, hotel rooms are empty and people are waiting for the other shoe to drop.

The Dow Jones industrials are now down 23.66 percent since Jan. 1; the Nasdaq is down 42.39 percent and the Town Crier index is down 42.02 percent. It’s been decades since we’ve had a drop like this. Institutional firms continue to sell their mutual and pension funds, and insurance companies are now selling their holdings to raise cash for settlements.

Of the 50 stocks that make up the Town Crier index, 46 took a hit for the week. Some large cap stocks like Applied Materials fell 20 percent, and high-flying Nvidia after splitting 2 for 1, fell 20 percent.

The bad news continues with worries about how the United States will retaliate for the terrorist attacks, and how much the economy will suffer in the months ahead.

It’s an emotionally filled stock market environment where investors try to save their portfolios. Until the market gets some answers to what the future holds for the economy, look for more sell-offs.

About $1.4 trillion in investor wealth evaporated from the market last week. If consumer spending starts to drop, it will add more pressure to the economy and the stock market.

Another factor is the layoffs. If they don’t spread any further and the war goes in our favor, then the market will recover quickly. If we have sudden military losses, look for the market to continue dropping. That’s just plain stock market history.

The unemployment rate will be at least 6 percent by the end of the year. That will have a big impact on consumer spending. Christmas sales will be terrible and this is an area of risk because many companies count on a good year’s end.

There are some events that should give the market a lift. On Oct. 2, the Federal Reserve will probably lower the interest rate another 50 basis points (1/2 point).

Some analysts think we are near the bottom of the market, but they can’t call it. The market is helped by current low interest rates and the big sell-off is now behind us. The best way for any investor to go is to be well diversified.

Standard and Poor’s The Outlook the last several months maintained a recommended portfolio allocation of 70 percent equities, 25 percent bonds and 5 percent cash. This week, they reduced their recommended equity allocation to 60 percent from 70 percent and hold a larger cash share in reserves (upped to 15 percent from 5 percent) to take advantage of stock opportunities as they develop. They advise to continue to keep 25 percent of total assets in bonds.

The shock of the recent terrorist disasters will fade. Unless we have a continuation of terrorism on U.S. soil and a more clear shape of the enemy, the economy and the market will turn positive again next year.

Noel, a seasoned investor, covers the stock market for the Town Crier.