Despite Alan Greenspan's assurances the U.S. economy is holding up in the face of corporate scandals, his acknowledgment of a slow recovery continued to cast a shadow over markets today.
"While the economy has held up remarkably well, not surprisingly the depressing effects of recent events linger," Greenspan said this morning in his twice-yearly report on monetary policy before the Senate Banking Committee.
But Greenspan's speech appeared to do little to soothe rattled investors' nerves. Markets once again had a volatile session, with the Dow Jones Industrial Average closing down over 150 points despite gaining some ground in the afternoon after posting triple-digit declines early in the session. The Nasdaq also closed slightly lower.
Selling pressure in blue-chip stocks continued despite some of the biggest names in business reporting better-than-expected earnings, including General Motors, Johnson & Johnson and Merrill Lynch.
Analysts had hoped that more good news about earnings could outweigh the mounting corporate accounting scandals and set the stage for a rally. But so far, that hasn't happened.
Greenspan addressed the effect of corporate malfeasance directly, saying "an infectious greed seemed to grip much of our business community," overcoming good judgment among some CEOs, leading to a loss of investor confidence in the markets.
"Although we may not be able to change the character of corporate officers, we can change behavior through incentives and penalties," said Greenspan.
But he told the Senate panel the country may be near the end of corporate scandals, as he expressed faith in the overall transparency of U.S. corporations: "Perhaps the recent breakdown of protective barriers resulted from a once-in-a-generation frenzy of speculation that is now over."
Despite Uncertainties, Fundamentals in Place
Greenspan said the nation still confronts considerable uncertainties, among them, the progress of capital spending, the return of profits, the potential for more corporate malfeasance and risks from global political risks and terrorism.
Nevertheless, he said the fundamentals are in place for a return to sustained healthy growth. He cited low inflation, improving inventory imbalances and strong productivity growth.
Greenspan also indicated that the Fed would stand pat for now on interest rates, with low inflation allowing the central bank to keep short-term interest rates at their 40-year low of 1.75 percent so far this year.
"With inflation currently contained and with few signs that upward pressures are likely to develop any time soon, we have chosen to maintain that stance," he said.
Is This the Bottom?
Greenspan's remarks came on the cusp of a wild ride for the Dow on Monday, when the blue-chip index fell 440 points before swinging back in a late-day recovery to close just 45 points down. The drops also rocked world markets, with major Asian and European stock markets seeing turbulent sessions.
Whether or not the drops will continue remains to be seen. One school of thought is that stocks have a lot more room to drop before a bottom is reached, but more bullish forecasters say they sense that a bottom may already be close at hand, especially if corporate profits begin recovering.
"Our best near-term possibilities are if we do start seeing positive surprises coming through here on second-quarter earnings and particularly in guidance over the rest of the year," said analyst Richard Dickson of Hilliard Lyons in Lousiville, Ky.
But other analysts noted that a market bottom may still be a while off and investors will likely remain cautious in the meantime.
"To get the bull market alive and well again, we're probably gonna have to wait until perhaps September, when we'll start to think about third-quarter and fourth-quarter earnings … where we're looking for a substantial rebound," said Al Goldman, chief market strategist for AG Edwards and Sons in St. Louis.
Can Greenspan Do What Bush Has Been Unable To?
If Greenspan could have brought about a measure of calm in the stock market, he would have succeeded where so far the president has not. Stocks plunged on Monday even as the president was trying to reassure investors government would deal with corporate malfeasance.
The White House sees Bush as being unfairly blamed for the devastation on Wall Street, yet never credited for rebounds like the one late Monday.
And advisers are concerned about a possible erosion of public support for the president amid the plunging market, as well as questions about his stock trading when he was a director of Harken Energy and the suit filed against Vice President Dick Cheney, alleging accounting wrongdoing when Cheney headed the the giant energy firm Halliburton.
So to inspire new investor confidence in Wall Street, the president has issued a statement praising the corporate-crime bill that Democrats passed in the Senate, an indication he will sign it.
Analysts agreed the market will stay nervous because some big shoes have not dropped yet:
Two key senators are demanding changes in how lucrative stock options are doled out to executives.
Past corporate dealings of Bush and Cheney are under growing scrutiny.
Congress is about to scrutinize the investments of domestic diva Martha Stewart, which may attract more interest in corporate scandals.
Nevertheless, veteran trader Arthur Cashin of UBS Paine Webber said he saw corrections in the market. "The excesses of what is roundly seen to have been a big bubble, particularly in the technology and other stocks, are being corrected," he said.
Analysts talk about a market disconnect, saying the economy is basically strong. But with the second-quarter earnings season gearing up, it just seems that there are still enough question marks to keep investors thinking about selling — or at least being ready to sell — until the uncertainty passes.
And despite the market's gyrations, analysts like David Katz of Matrix Asset Advisors says investors should remain calm and think long term.
"The key is don't panic. Remember your 401(k), it's a long-term investment program. Most people have 10 or 20 years in it," maintains Katz, adding: "The stock market will go up and down a lot in that time period. So you absolutely want to be invested in the stock market. Don't change your allocation. If anything, increase your stock exposure."
ABCNEWS' Bill Blakemore, Betsy Stark, Jim Hickey, Ann Compton, Tom Gauger, Bob Schmidt, Steve Taylor and Kate Bouey contributed to this report.