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Wall Street in search of a new script

Wall Street is struggling in search of a new script as market pundits debate the importance of Goldilocks, Chicken Little and the potential of some vicious market bears.

Turmoil on financial markets appeared to ease over the past week as US and other markets recouped a portion of the losses from a prior weeklong slide in global equities.

But analysts remained divided on whether the plunge was a healthy "correction" or the start of something more worrisome for Wall Street.

In the week to Friday, the Dow Jones Industrial Average of 30 blue chips rose 1.34 percent to 12,276.32, rebounding from the worst week in four years and a 4.2 percent slide. The broad-market Standard & Poor's 500 increased 1.13 percent to 1,402.85 after a 4.4 percent tumble the prior week. The tech-dominated NASDAQ composite added 0.82 percent to 2,387.55, recovering from a 5.8 percent slump.

For several months, the theme on Wall Street had been the "Goldilocks" economy -- neither too hot, nor too cold, but just right for growth, inflation and stock market performance.

But the turbulence in global equity markets has bought out another fable -- Chicken Little -- who thought the sky was falling, according to some analysts who see the mood shifting to panic mode amid worries about a US recession.

"Instead of complacency, we see Chicken Little, which is another story, not quite Goldilocks, when investors, analysts and media begin to proclaim the sky is falling," Societe Generale economist Stephen Gallagher said.

But Gallagher said he did not see a justification for the panic seen on some markets in the past two weeks.

"The pullbacks in the markets tied to these events are sporadic, but do not necessarily spell gloom and doom for markets or economies," he said.

Some analysts see soft conditions ahead that could force the US Federal Reserve to cut interest rates.

"We continue to expect the Fed to ease by 75 basis points during the course of 2007," Seamus Smyth at Goldman Sachs said.

"Driving this expectation is our belief that the labor market will soon begin to deteriorate," he said.

Friday's economic data brought some optimism back to Wall Street. One report showed 97,000 new jobs generated last month, while another showed the US trade deficit narrowed 3.8 percent to 59.1 billion dollars.

The economic data "has been mixed at best," said Mary Ann Hurley, analyst at DA Davidson. "We need to see more data going forward to declare a victory for Goldilocks."

Meanwhile some analysts say investors need to prepare for a so-called "bear market" in which stocks drop 20 percent or more and hold in a prolonged slump, even if it is a remote possibility.

Wachovia strategists Doug Sandler and Chris Konstantinos said in a note to clients that "successful investors prepare themselves for all possibilities, including the dreadful ones."

They argue that "the tactics and strategies one should employ when confronting a real bear are not that different than those that should be employed when confronting the market bear, in our view."

The yield on the 10-year Treasury bond rose to 4.589 percent from 4.515 percent a week earlier and the 30-year bond yield increased to 4.723 percent from 4.650 percent. Bond yields and prices move in opposite directions.
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