Terror, Scandal Return to Haunt Investors

Nov. 17, 2003
By Adam Shell, USA TODAY

NEW YORK — Past enemies of the stock market whom investors have recently been ignoring terrorists, Saddam Hussein and unethical financial professionals are again spooking Wall Street and exerting downward pressure on stock prices.

The market, which less than two weeks ago was threatening to break out to fresh 2003 highs, has stalled. Since its 2003 peak on Nov. 3, the Dow Jones industrial average has fallen eight of the past 10 trading sessions, short-circuiting the momentum it had been building amid a steady stream of positive economic reports. The Dow fell 58 points Monday, or 0.6%, to 9711, following a sharp drop in Japan on terror worries.

Investors were reminded of geopolitical risks over the weekend when terror network al-Qaeda said it carried out attacks against two synagogues in Turkey, and named the USA and its allies as car-bombing targets. Saddam purportedly called on Iraqis to repel American forces from Iraq. And in the mushrooming fund scandal, Morgan Stanley settled with regulators Monday for $50 million for allegedly engaging in secretive sales practices.

"All of a sudden, al-Qaeda seems like they are back in business, and Saddam is still out there," says Todd Leone, a stock trader at SG Cowen. "There are a lot of things scaring investors now."

As they did in the months leading to the Iraq war, investors are pricing in some of the added risks associated with geopolitical uncertainty, adds Russ Koesterich, chief U.S. equity strategist at State Street Global Markets.

The timing of the pullback also coincides with the Dow's latest attempt to crack the key 10,000 level. Selling kicked in Nov. 7 after the Dow rallied within 54 points of the psychological barrier. The Dow has closed above 10,000 on 18 occasions since its first foray above the milestone in March 1999, only to fall back.

It's unclear whether the recent skid is the beginning of a steeper decline. Some traders blame the weakness on profit-taking by investors looking to protect big 2003 gains (the Dow is up 16%; the Nasdaq is up 43%). Some traders believe the fund scandal is weighing on investor confidence and stock prices.

The declines might also be signaling that forward-looking investors are factoring in new information that could affect stock prices six months from now. "Investors are now peering into the second quarter of 2004," says Richard Cripps, chief market strategist at Legg Mason. They are watching out for warning flags that can tip them off to potential problems.

Worries haunting Wall Street include: rising interest rates; uncertainty surrounding the 2004 U.S. presidential election; and the hard-to-quantify scandal fallout. The biggest wild card is terror. Says Leone: "The fear is (suicide bombers) will come to America."

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