Troubled waters: conflicting economic signals delay market recovery. (Market Moves).

The Dow Jones industrial average fell from this year's high of more than 10,600 points, to close to 8,200 points by mid-September. The downward trend was fueled by growth concerns, corporate bankruptcies, downward revisions in corporate earnings and tensions arising from the escalating conflict between the United States and Iraq. Needless to say, Mexican stocks were contaminated by these events, moving around the 6,100-point mark, compared to a high of 7,500 points this year.

Major U.S. indicators have been giving mixed signals as to the strength of economic recovery. On the downside, the most notable cases were the ISM index for August, which rang in at 50.5 instead of the expected 51.8, the Consumer Confidence Index, in at 93.5 instead of the expected 97, and second-quarter gross domestic product (GDP), up 1.1% instead of an expected 2%. As well, first-quarter GDP was revised downward from 6.1% to 5.0%.

Economic fragility became more evident with the insolvency of US Airways, one of the largest airlines in the United States, and the rumors of bankruptcy at UAL Corp., as well as various downward corporate revisions. The most notable example of these was Intel, the largest producer of microchips worldwide, which recently revised its sales projections down for the third quarter.

On the other hand, there were also economic figures indicating a certain economic recovery that helped calm international markets. For example, U.S. industrial production has grown over the first seven months--after declining over 16 months--mainly because of zero percent financing in the auto sector. As well, unemployment for August came in at 5.7%, beating an average forecast of 5.9%.

However, the U.S. Federal Reserve Open Market Committee had the last word: "The current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate over time. Nonetheless, the Committee recognizes that, for the foreseeable future, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness."

In other words, it is possible there will be additional economic weakness in the short term, but it's likely that there will be a recovery in the long term.

Mexico is obviously subject to the cycles of its northern neighbor. Indeed, Banco de Mexico Governor Guillermo Ortiz recently said that the federal government's 1.8% economic growth target for 2002 is at risk because of continued weakness in the U.S. economy. He also said that the present economic scenario makes pending structural reforms all the more urgent.

As a result, we can expect the downward trend in U.S. and Mexican stock markets to continue, possibly throughout October, amid conflicting economic signals. However, it is very likely that the Fed will bring down interest rates further before the end of the year in an effort to offset the slowdown. Such a move would obviously be beneficial.

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Martin Lara ([e-mail]) is a Mexico City-based independent financial analyst.