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US Stocks Up - 2001-08-17

Across the board the U.S. stock market managed to finish the day in positive territory. Despite some more bad earnings forecasts, there are some positive signs for the health of the economy.

In a classic late-afternoon rally, Wall Street managed to wipe out early losses and regain some ground.

The Dow Jones Industrial Average picked up 46 points, half a percent to 10,392. The NASDAQ edged up 11 points, that is also half a percent to 1,930. And the broader S&P 500 index gained three points to 1,181.

Market analysts attribute the rebound to some positive economic news. New home construction is up, and the job market appears to be stable. In addition, falling consumer prices are also being seen as a good sign. That is because these data may provide the U.S. central bank with the incentive it needs to cut interest rates next week.

The fall in consumer prices is notable because the drop of 0.3 percent in July is the biggest decline in 15 years. Analysts had expected a fall but only by one tenth of a percent. That translates into good news for two reasons: it shows that despite the poor performance of the U.S. economy, the risk of inflation is virtually nonexistent. It also means consumers will have more incentive to spend their tax rebates as the money will now go further.

Another reason analysts think interest rates will be cut is the performance of the dollar. Although it is still strong, it has slipped against other major currencies lately. There have been several calls for the U.S. Government to relax the strong dollar policy to help U.S. manufacturers and thereby kick-start a recovery.

But Mickey Levy of the Bank of America points out that from another point of view a strong dollar could be just what's needed at the moment. "The fact that the dollar has been strong has not been an inhibiting factor for the dollar," he said. "A key point to bring out here is that it does hurt manufacturers. It increases the purchasing power of consumers and consumption is two thirds of GDP. So it changes the mix of economic output but it certainly doesn't inhibit recovery."

Incidentally, earlier in the day the dollar slipped to a five month low against the Euro before regaining some ground.

Despite those positive signs, the rally on Wall Street was limited. This is because high-profile technology companies continued to release poor earnings estimates. Ciena and Brocade, two prominent companies in the sector were forced to cut their profits forecasts. That reinforces the belief the technology sector is still too weak to sustain a recovery.