Middle East hostilities
unnerve Wall Street

Bristol-Myers Squibb's earnings warning
also sets a negative tone for the week

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By Lisa Singhania
Associated Press

NEW YORK >> Despite the cataclysmic events of Sept. 11, Wall Street somehow seemed to forget about the outside world as it focused on the domestic economy.

Until this past week.

The intensifying conflict in the Middle East sent stocks sharply lower as investors were reminded that stocks are vulnerable to events outside of U.S. borders.

"The market never likes uncertainty and the outcome of this thing is extraordinarily uncertain," said Bill Barker, investment consultant at RBC Dain Rauscher. "Is it going to escalate into something that blows the Middle East apart and disrupts energy supplies? Is there going to be an oil embargo by the Arabs to turn world opinion against the Israelis? No one knows."

Of course, the crisis wasn't the only reason investors sold. A handful of reduced earnings forecasts -- the biggest from Bristol-Myers Squibb -- provided an inauspicious start to the first-quarter earnings season and led some investors to question whether business was indeed turning around.

But the renewed fighting between Israelis and Palestinians wasn't something the market had expected or factored into its forecast for a recovery.

Instead, Wall Street seemed to have temporarily forgotten about foreign affairs. Pleased with the relatively uneventful way the U.S. war in Afghanistan was progressing, investors had felt comfortable enough to buy, sending market gradually higher.

The occasional pullbacks, most recently one in late March, were chiefly because of earnings prospects, not fears of violence overseas.

Now the tension in the Middle East has given investors another reason to second-guess their optimism.

"This whole Middle East thing has added an additional worry for investors already concerned about earnings," said Richard A. Dickson, technical analyst at Hilliard Lyons. "They don't know what's going to happen next."

Dickson believes this past week's earnings news likely would have pressured stocks anyway, but the losses would have been more limited.

IBM, Micron Technology and WorldCom fell sharply after investment firms expressed concern about their performance. The selling wasn't confined to technology, however.

Barker speculated that the approach of April 15, the deadline to file federal taxes, was another factor. "You've also got some selling to pay income taxes."

Even the one sector that would seem mostly likely to benefit from the tension -- oil stocks -- struggled. Although stocks including ExxonMobil, Schlumberger and Baker Hughes showed gains early on, the advances proved unsustainable. Analysts attributed the reversal to investors cashing out their wins.

"People are relatively quick to take profits even in areas where there's potential because they don't know what's going to happen next week," Dickson said, adding that the market could fall again should the violence in the Middle East spread, oil prices spike out of control or there be another domestic terror attack.

Still, amid the warnings and investment firm downgrades, there are reasons to be encouraged. 3M rose yesterday on word its first-quarter earnings would be at the high end of previous estimates. Alcoa, which yesterday was the first Dow Jones industrial to release results, met expectations.

On the economic front, U.S. companies added jobs in March for the first time in eight months, fresh evidence that the economy is on the road to recovery even though the unemployment rate rose to 5.7 percent from 5.5 percent the previous month.

And early in the week, the Institute for Supply Management, formerly known as the National Association of Purchasing Management, reported a better-than-expected increase in its index of business activity -- another indication that the economy is recovering.

If earnings forecasts for coming quarters begin to show some improvement, the market might have an incentive to set aside its Mideast worries.

"I think the Middle East is going to be an ongoing uncertainty but it will subside in degree," Barker said. "The market will get used to this, just like it got used to Enron."

The selling took a toll on the market's major indexes.

The Dow fell 132.30, or 1.3 percent, to 10,271.64, despite gaining 36.47 yesterday.

The decline was even more dramatic on the Nasdaq composite index. It fell 75.32, or 4.1 percent, after falling 19.72 yesterday to end at 1,770.03.

For the week, the Standard & Poor's 500 slipped 24.66, or 2.2 percent. It lost 3.61 yesterday to 1,122.73.

The Russell 2000 index, the barometer of smaller company stocks, also fell, dropping 8.70, or 1.7 percent, after falling 0.61 yesterday to 497.76.

The Wilshire Associates Equity Index, which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues, ended the week at $10.551 trillion, down $224.310 billion from the previous week. A year ago the index was $10.318 trillion.