Certain that government stimulus and multiple interest rate cuts will put the steel back into stock prices, bullish strategists are advising investors to buy now so that they won't miss the inevitable and imminent turn. Never mind that many of these brokerage-firm carnival barkers have been predicting the end of the bear market since the Federal Reserve began its easing action in January.
Typically, stocks do begin to recover well before an impaired economy does. Since 1960, according to statisticians at Standard & Poor's, the stock market has bottomed, on average, seven months after a recession has begun. But averages can be deceiving. While the market bottomed just three months after the 1990 recession started, it took 13 months of recession before stocks started their recovery from the 1980 to 1981 downturn.
Like Leo Tolstoy's unhappy families, every slump is different. And the terror attacks will give this recession a nature all its own. That's because corporate earnings, already in decline, will be further stunted by the increased costs associated with life among the terrorists.
Investors do not yet seem focused on how much higher the costs of doing business will be in the harrowing new world. Soon, they will have to be.
Even before Sept. 11, insurance costs were on the rise. The business is extremely cyclical: Prices fall when insurers try to gain market share and rise when they try to bolster their profits. Add to this the not-yet-measurable costs of increased security and you have a big drag on earnings.
Alice Cornish, an analyst at Prudential Securities in Boston, has done a thorough analysis of the higher costs to cover risk that US companies will face in coming months. Those costs will not be clear until the government decides how much of the bill for Sept. 11 it will pay and how much it will make insurance companies cover. Still, Cornish expects pretax profits for the companies in the Standard & Poor's 500-stock index will drop by an average 2.5 percent next year because of higher insurance prices.
"There is a very high probability that the insurance market next year will be the most difficult ever for finding affordable coverage," Cornish said. Why? Corporations will not only find insurance more expensive to secure, they will also have to agree to higher deductibles.
For years, companies have enjoyed low insurance costs. In 1999, premiums were lower than they were in 1984, Cornish pointed out. Earlier this year, they began to rise. Technology companies, for example, started experiencing large jumps in professional liability insurance, such as directors' and officers' insurance, which is used to cover the costs of shareholder lawsuits.
Cornish has assessed the likely rise in several industries' cost of covering risk next year. Costs include business interruption and property insurance, workers' compensation premiums and payments for consulting services.
The results vary widely. While Cornish estimates that such costs will rise 36.6 percent at communications services concerns, pretax earnings should decline, at most, by only 2.3 percent. But at health care companies, whose risk costs are already high, costs may jump 35.5 percent, causing an 11.5 percent hit to pretax earnings.
Increased costs will also drag down earnings at cyclical consumer companies, like carmakers and appliance manufacturers, where earnings could decline as much as 8.2 percent, and makers of consumer staples -- food companies -- which could see their pretax profits fall 5.4 percent.
Although Cornish reckons that technology companies' costs of risk will rise 44.1 percent next year, they are starting from a very low base and will have a muted impact on profits. Financial companies are in similar circumstances, she said.
Some companies will be hurt more than others, because risks vary. But Cornish said: "Insurance premiums now need to return to a level more commensurate with the risk. Sept. 11 has influenced this perception."
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