(October 13) – “It was supposed to be the day that Wall Street stabilized. Overnight the professionals who trade stock index futures bid up the prices. They were confident that the stock market would rally yesterday morning,” writes Floyd Norris in today’s Wall Street Journal.

“But it did not. Instead, the Dow Jones industrial average, which had been relatively calm as Nasdaq slumped, had its worst day since the spring meltdown. It ended just above 10,000 after losing 379 points, or 3.6 percent. Less than a quarter of that came from the latest disaster story, at Home Depot. There was selling almost everywhere, although some money went into companies like Procter & Gamble, whose business is less sensitive to the economy.”

“Home Depot’s woes may be instructive. The big disappointments heretofore have been in technology stocks, whose high valuations left them vulnerable to slower growth. Home Depot is not a technology company, however, and its weaker growth reflects widespread problems: competition has intensified as the economy’s growth has slowed while higher energy costs cut profit margins.”

“Those higher energy costs are not limited to retailers, of course. As winter heating bills soar this year, Americans will face choices. Do they pay for heat by cutting back on Christmas gifts or by cutting back on investments? Neither option looks very attractive for stock prices.”

“Perhaps the slide will end soon. Maybe the mutual funds have almost finished their year-end tax selling, before they close their books at the end of October. Maybe stocks will rebound today, on Friday the 13th. (This great bull market began on Friday, Aug. 13, 1982, so that day does not have to be unlucky.) Maybe, as so often before, investors will see the decline as a buying opportunity. The belief that stocks always rise, at least in the long run, is still widely held. And anyway, the Dow has gone down for six consecutive sessions, and it has been more than a decade since it had a string of seven straight losses.”

“But just as investors are unprepared for the notion that stocks can go down and stay down, so are the folks in Washington. The great budget debate being conducted by Al Gore and George W. Bush assumes there will be trillions in surpluses over the next decade that they can divvy up in tax cuts and spending. There is no discussion of just how closely those surpluses have been tied to the bull market.”

“Robert J. Barbera, the chief economist of Hoenig & Company, points out in a report entitled ‘The Bubble Budgets’ that what took budget forecasters by surprise was the surge in individual income tax payments, reflecting capital gains and taxes on profits from stock options.”

“The official budget forecasts assume that those high tax payments will keep on coming. Which is to say, they assume that bear markets have been repealed. If that assumption proves wrong, the budget surpluses will shrink drastically, even if the economy keeps growing.”