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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | SEPTEMBER 13, 2001  MARKET VIEWS • From S&P The View from S&P: Where to Now? Among the calls from Standard & Poor's experts: A short, sharp recession, dicey times for stocks, and a possible uptick in inflation
From an economic standpoint, uncertainty triggered by the attacks will translate into a pullback in consumer spending. More importantly, businesses are not likely to make new spending plans -- and will cut back existing ones. This will also have a negative impact elsewhere in the world, especially on technology-sensitive Asian economies, namely Singapore, South Korea, and Taiwan. Standard & Poor's now expects a 0.5% contraction in third-quarter gross domestic product, and a 0.5% pullback for the fourth quarter as well. Two consecutive quarters of negative GDP growth is the "textbook" definition of recession. Unemployment will peak at 6% in the middle of the next year vs. the previously estimated 5.5% rate. Any recovery could be slow, especially if there is no quick military or political resolution to the terrorist threat However, it's more likely that if nothing else unpleasant happens, any such recession will be a short, sharp shock, similar to the contraction seen in 1990-91, with consumer confidence starting to return in a month or two. However, it will take some time for the U.S. economy to to crawl out of this hole. S&P thinks it's likely that the world's central banks will have a coordinated rate cut (1/2 percentage point each from the Fed and European Central Bank) next week. As for GDP, S&P sees 2.5% growth in the first quarter of 2002 and 3.0% in the second. The big question for equity markets will be if the terrorist attacks lead to further technical breakdowns in the major averages. The bright side is that this would hasten the arrival of a selling climax. The expected increase in government spending (the defense budget is sure to rise, and there's likely to be a moratorium on partisan arguments about deficit spending) and injection of liquidity into the market will have a potentially inflationary effect. And that calls into question the outlook for bonds. All in all, S&P believes it prudent to place its recommended asset allocation and 1350 year-end target for S&P 500 under review. Some comments from S&P experts: KENNETH SHEA, Director, S&P Equity Analysis Group: We expect continued downward pressure on corporate profits S&P is reconsidering its overweight stance on consumer discretionary issues. S&P Analytical continues to recommend defensive issues. DAVID BLIZTER, Chief Investment Strategist: It's important to note that manufacturing capacity was unaffected. However, travel-related industries, particularly airlines, will suffer. There are a lot of skills that will be in short supply in the financial industry -- and it might be hard to attract people to work in Lower Manhattan. New York City's economy will be boosted by construction, but any significant shortage of office space would lead to migration away from Gotham. SAM STOVALL, Chief Sector Strategist: We don't expect the uncertainty raised by the attacks to go away rapidly. Unlike the Gulf War, we don't know precisely where our enemy is. If there are more attacks, confidence will fall further. We expect a big increase in telecom equipment spending, as people will prefer to work from home, to be out of harm's way. S&P also sees a "decentralization" movement in real estate, away from urbanization. Consumer discretionary issues, particularly Leisure, Hotels, Entertainment will be negatively affected; Transportation, in particular Airlines, will not do well. Right now, S&P views favorably defense-related stocks, telecom equipment and service stocks. Also, we think toy companies might do well. Any advice, analysis, or recommendations contained in articles labeled "Advice from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of Business Week Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis or recommendations that are published by Standard & Poor's. Standard & Poor's and Business Week Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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