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Have the Bears Finally Arrived on Wall Street?

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Wake up, Goldilocks — the bears may be coming home early. The stock markets were reeling again Friday, still weak-kneed from what TIME senior economics reporter Bernard Baumohl calls "a one-two punch and an uppercut." A skyrocketing trade deficit (proving that consumers are still spending way too much) and a sliding dollar (against not only the yen but also the euro) have both rekindled fears that the Fed will hike rates at its board meeting October 5. The uppercut? Microsoft prez Steve Ballmerís must-have-had-a-few-too-many comments to a roomful of tech reporters about how tech stocks — even his — are way overvalued. Investors fell all over themselves to drop the Nasdaq 108 points, with the Dow in hot pursuit. With the sell-off still chugging along on Friday, are we in for a cruel, cruel Indian summer?

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These bears donít look like man-eaters. But itís no aberration, either — the breeze of prosperity is simply blowing offshore for a while. "If you look at the chart, the U.S. stock market hasnít really done much since April," says Baumohl. "Investors here are looking at the beginnings of a recovery in Asia and Japan, and suddenly they feel very overweighted in dollar assets." That means dollars and U.S. equities are getting dumped for yen and Japanese ones. If it keeps up, the Dow could easily dip below that vaunted 10,000 sometime this fall, but Baumohl doesnít see the end of the U.S.í recent golden age. "I still donít think the Fed is going to raise rates," he says, "and the economy is still fundamentally very solid." And what if the Fed does raise rates, slowing down the economy and letting still more air out equities? Put the porridge in the fridge — a reallocation into bonds might be just right.
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