Slaughterhouse Week on Wall Street

The week just ended will be remembered among investors for the Wednesday to Friday sprint stocks took on the road to recession. On Friday alone, the Dow Jones Industrial Average lost 191 points, shaving 1.86 percent off the index of the 30 industrials. The Standard & Poor's 500 index lost one and two-thirds percent of its value; and the NASDAQ composite index lost just shy of two full percentage points of its value. For the week, the Dow took a 3.6% loss on its value; the Standard & Poor's 500 got whacked for 3.3% of its value; and the NASDAQ got its clock cleaned to the tune of a 4.6% smack-down.

In the case of the Dow blue chips, the index is now just north of 88 points above the 10,000 point level that some technical analysts see as a major psychological neckline. With the Dow Industrial Average having lost more than a hundred points on both Thursday and Friday, that break point is well within this market's striking range this coming Monday. Other analysts might argue, however, that the market is due for a breather, as bargain-hunting investors begin to buy up stocks that were dragged down too far in the hurricane downdraft this week. Older investors used to call such turns to the upside "rallies in the bear market," and the stage may be set for a return of bulls next week ready to fight for lost turf. It is not likely, however, that the bears will simply walk away from another try at beating up the market.

Much of the action will pivot on macroeconomic data pouring out next week. Even though quite a few corporate earnings statements will be released, investors seem to be keen on the big picture, right now; and there will be plenty for them to chew on: Tuesday, the March producer price index will be published, and the consumer price index will follow on Wednesday. Investors will be paying close attention to these numbers to get some idea of how long and how aggressively the Federal Reserve plans to push interest rates up in its fight against the inflationary pressures that Fed Chairman Alan Greenspan has said are under control, even as he has shepherded the Federal Open Market Committee through a record run of rate increases.

The New York Fed released its Empire Manufacturing Report on Friday, and the news wasn't good for the state's manufacturing sector, which is seen as one of many important guages of regional—and to some extent, at least, national—business activity.

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The Federal Reserve System is divided into 12 regions, each overseen by a Fed district bank. Among other functions, each district bank collects and disseminates economic data from its territory.

  While analysts who follow the index had predicted that the April value would fall modestly to 19 from its March figure of just over 20, the survey index actually fell to 3.1. That's right, the index was expected to drop from 20.2 to 19, but instead, it dropped from 20.2 all the way down to 3.1. This alone would have been enough to make grown institutional investors have bladder problems, but it was only the latest in a growing drumbeat of bad numbers, including the Johnson Redbook survey released earlier this week that showed retail sales at department stores were drying up, even for some basic items like clothing.

Although of little comfort to stock investors who've just seen the values of their portfolios slashed mightily, the sell-off in stocks freed up money that went straight to bonds in a "flight to quality" scenario reminiscent of previous pre-recessionary portfolio re-alignments by the big players on Wall Street.

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Eventually, or so theory goes, recessions cause interest rates to fall far enough that business and consumer spending start to pick up, leading to a recovery.

  With buy orders for bonds surging, bond prices have been moving up smartly, pushing yields down, if only temporarily. Over the longer term, continued rate increases by the Federal Reserve, coupled with massive borrowing by the federal government to fund record-breaking deficit spending, is expected to keep the overall pressure upward on bonds, meaning that business and consumer borrowing will still be under seige for some time to come, which will add to recessionary forces acting on the U.S. economy.

The White House and Congress have yet to move in a unified fashion to try to stave off the looming recession, choosing instead to address matters such as a highly controversial bankruptcy reform bill and a bill to end estate taxes. The former bill, which will make declaring bankruptcy far more financially catastrophic for individuals, will go into effect quite quickly, just in time to have impact on the millions of people who will be adversely affected by the downturn in the economy. The repeal of estate taxation will go into effect at the beginning of the next decade, so any impact it might have will occur substantially after the impending difficult times have long passed... unless, that is, the Republicans who are responsible for the current fiscal, financial, and economic disasters are still in power at that time, in which case, some might argue, many people will have little remaining to pass on in estate, anyway, particularly if their money was invested in the stock market.