The tense military standoff in the Middle East and soaring oil prices following Iraq's invasion of Kuwait on Aug. 2 have claimed the bulk of media attention in explaining why equity prices have fallen precipitously in August.
But some analysts - particularly those with a technical approach to the stock market - are convinced that stocks are falling on prospects of a full-fledged U.S. recession, and not on fears of a war in the Middle East or explosively higher fuel prices, per se.The Dow Jones industrial average, the most popular measure of blue-chip stock performance, has plummeted over 400 points on an intraday basis since its all-time highs of mid-July.
On a closing basis, the Dow has plunged 353 points, or 11.7 percent, in the 24 trading days between its July 16 peak of 2999.75 and the market's close on Friday.
"From a cold market standpoint, all the Iraqi invasion did was speed up the bear market," said veteran technical analyst Richard Russell, who publishes Dow Theory Letters from La Jolla, Calif. "With or without the oil crisis, there's a `level' down there that the bear market is heading for.
" `News goes with the trend,' states the old Wall Street adage. So people are regarding the stock market's behavior as a natural reaction to the war scare in the Middle East and the oil-price shock," Russell said.
"But they're not seeing the big picture," he said. "Economists seem to be literally hypnotizing each other with statements that there will be no recession, but the stock market is announcing one loud and clear."
Russell said the stock market, in its inimitable fashion, has finally begun to discount some dire economic consequences that will not be fully apparent to economists for months.
"The Iraq crisis threatens to run the already horrendous federal budget deficit into the wild blue yonder," Russell said. The Arabian Peninsula crisis has effectively sidetracked many of the military budget cuts that are widely believed essential to trim federal shortfalls and promote lower U.S. interest rates in order to shore up a sagging economy.
Federal Reserve Chairman Alan Greenspan has repeatedly told Congress and the White House that a respectable stab at budget control is a prerequisite for easier monetary policy from the Fed. But Russell said the latest figures show that, without "smoke and mirrors," the federal deficit is currently growing "at a cool $7 billion a week."
Moreover, new gas and oil taxes to redress gaping budget deficits are also on the back burner, Russell said, thanks to a more than 50 percent explosion in global crude-oil prices.
"Rising oil prices could not have come at a worse time, when the nation is either in or close to recession," Russell said.
The falling U.S. dollar, which only this week slumped to new post-World War II lows against the German mark, will only exacerbate the inflationary surge that historically inaugurates a deflationary recession, Russell said.
A declining dollar, while helping to shrink the U.S. merchandise trade deficit - June's trade gap was only $5.07 billion, the narrowest since June 1983 - is inflationary in that prices rise on the imported goods to which U.S. consumers are addicted.
"The party's over," Russell concluded. "Slowly but surely, people are beginning to revise their opinion of the Reagan years. They now see that `Reagan prosperity' was simply a credit-induced boom. Now it's pay-back time. When you `party and borrow,' you can count on one condition in your future - a lowered standard of living."
Technical analyst James B. Stack, who scrutinizes Federal Reserve policy and publishes the InvesTech market letter from Whitefish, Mont., said several technical "recession warning flags" are already flying.
"We expect another to be raised the 1st of September when the Survey of Purchasing Managers (for August) drops under 46 percent again," Stack said. A reading under 50 percent suggests that the economy is contracting.
"Investors have to toss most economic indicators out the window these days, including durable-goods orders, industrial production, retail sales, inventory levels, GNP reports and even the index of leading economic indicators," he said. "They lag too far behind the economy, they're too volatile, and they're subject to huge revisions. These statistics provide little evidence of an impending recession."
But the real keys to economic growth or contraction are business confidence and the willingness of the consumer to spend.
"Failing confidence always precedes a failing economy," Stack said, and plummeting equity prices on Wall Street are one sure way to give businessmen pause before embarking on expansion plans for plant, equipment and new products. Plunging stock prices are also guaranteed to catch the consumer's attention and tighten his purse strings, Stack said.