Many expect new market aftershocks

By Matt Krantz, USA TODAY

Investors are steeling themselves for another rough week on Wall Street, with the market's sell-off already at historic proportions.

Trends from last week show most investors aren't buying until there's a better signal of how badly the attack has injured the economy.

Consider the Dow Jones industrial average, which Friday lost 140.40 points to 8235.81. That created a crushing 8-session, 17.9% decline — the worst 8-day streak ever, and the worst week since the Great Depression, says Gibbons Burke of MarketHistory.com.

Making things even murkier, investors will have to wait until November for data showing how the economy has been affected by both the crisis and this year's cuts in short-term interest rates, says Charles Blood, strategist with Brown Bros. Harriman.

That leaves investors to worry in a "vacuum," he says. Military action against suspected terrorist Osama bin Laden can only fan volatility. And Wall Street is bracing for another round of lower earnings projections by companies and the release of the consumer confidence report on Tuesday.

All investors have to go on so far is the market's reaction last week:

• Investors are preparing for the worst. The market has reacted much more violently to this crisis. Last week, the Dow fell 14.3%, the Nasdaq composite index 16.1% and the Standard & Poor's 500 11.6%. Even after Pearl Harbor, blue chips were only down 4.6% after the attack, MarketHistory.com says. After the Gulf of Tonkin incident, which plunged the USA into the Vietnam War, blue chips only declined 0.6% in the following week.

• Small-cap stocks are taking the brunt, and are expected to recover last. Stocks in the S&P 500 worth less than $1 billion collapsed 24.6% on average last week. Not surprisingly, the hardest-hit stock in the small-cap group was US Airways, which fell 61%.

Stocks in the S&P 500 worth more than $5 billion declined a more palatable 12%. Those worth more than $1 billion but less than $5 billion declined 16%.

The small-cap sell-off shows that investors determined to hold stocks are seeking the bluest of blue chips, says Brad Lawson, senior research analyst with Frank Russell, an investment firm. "In times of uncertainty, money goes to larger-cap stocks that are perceived as safer," he says.

Small-cap stocks will deteriorate further relative to larger firms as the flight to quality continues, says A.C. Moore, a strategist with Dunvegan Associates. "Quality is where the resilience will be," he says. Investors are already showing their faith in blue chips.

General Electric, which is in both the media and aircraft businesses hurt by the attacks, Friday gained 93 cents to $31.30, after reassuring investors it is still on track for double-digit earnings growth in 2001. Even so, General Electric lost 20% of its value last week.

Not all small-cap stocks are getting hurt. But small companies benefiting have been in narrow areas such as video conferencing, security and defense, says William Julian at Salomon Smith Barney.

• There haven't been any safe spots within travel stocks. Last week the airlines were slashing workforces, pleading for a federal bailout and flirting with bankruptcy. The S&P airlines group was the week's second-worst industry group, losing 29.6%.

The lodging-hotels industry group fell slightly more, 32.7%. This shows how deeply the travel business has been shattered and how vulnerable the debt-laden industry is.

Investors with patience, though, shouldn't get caught up in the despair. "We're closer to opportunity than disaster," Moore says. America on alert