The Stock Market: Zap!

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A great debate rages as to how the consumer drama will play out. The worry factor is not to be underplayed. Recessions and bear markets are as much about psychology as fundamentals, which is precisely why the stock market--unable to find something it can believe in--has worked up such a sweat. To that extent, the media may be fueling the pessimism. In January, TIME put the worried faces of a family of four on the cover and expounded on HOW TO SURVIVE THE SLUMP. More depressing has been the recent stream of daily headlines about plunging stock prices. And in a high-risk bid to win support for his tax cuts, President Bush has been sounding alarm bells that reach into every kitchen.

Indeed, both parties are trying to score political points from the economy's troubles. House majority leader Dick Armey is pushing for a higher tax cut than the $1.6 trillion Bush has proposed. The slowdown makes it more likely that tax cuts will come quicker and be retroactive to Jan. 1. But sliding stocks will make Bush's plan for Social Security accounts--ostensibly for stock investing--a tough sell.

Democrats are quick to blame Bush, claiming that all his talk of a worsening economy created a self-fulfilling prophecy. "The Bush Administration has been talking down the economy for some time," claims Senate minority leader Tom Daschle, insisting that consumer confidence dropped every time Bush or top aides gave gloomy forecasts--in November, when then vice presidential candidate Dick Cheney announced, "We may be on the front edge of a recession"; in January, when Treasury Secretary Paul O'Neill said, "There is no doubt that we are experiencing a slowdown"; and in February, when Bush claimed that "a warning light is flashing on the dashboard of our economy."

All this tea-leaf reading, and no one knows for sure if we will actually get a recession. One thing we do know: stocks are in their worst rout in two decades. The Dow's all-time high of 11,723 came on Jan. 14, 2000, and it has since fallen 16%. That's nothing compared with the 25% decline since last March in the more tech-exposed S&P 500. The tech-laden NASDAQ has plunged 63% since its peak a year ago, the worst drubbing for a major stock index since the Depression.

Most alarming last week was that the Dow, which had been weathering this typhoon rather well, took the biggest hit--falling 821 points, or 8%. If the selling spreads, Philip Morris and other recent gainers may be the next to tumble as worried investors take winning chips off the table.

Despite the sell-off, the probability of a repeat of the crash in 1987 remains low, says David Blitzer, chief investment strategist at S&P. Still, preceding that crash "we had a high volatility week and a high-anxiety weekend," he notes, adding that the current environment feels a lot like that. And so far there has been no cathartic sell-off, just a steady exodus, mainly from tech stocks. Market watchers would like to see capitulation--a panicky selling spree that flushes out all the worrywarts and sets the stage for the next bull market.