Many wonder if this stock market rally is sustainable
Enviado: 9/5/2003 14:50These numbers don't lie. They're indisputable. Not even Wall Street can fudge them. Since sinking to 2003 lows in early March, the Dow Jones industrial average has rallied 13.8%. The tech-packed Nasdaq has jumped 18.5%. And if you go back to the Oct. 9 bear market lows, the gains are even more stellar, with the Dow 17.5% higher, and the Nasdaq up 35.2%.
While gains are legitimate, there is a heated dispute among investors about what the heady returns might mean for the stock market in coming months. The debate centers around a key question: Does the sizable advance the past seven months mark the final transition to a new bull market, or does it instead signal the beginning of the end for the advance?
Wall Street is at an important inflection point. The market is going up again, but investors don't seem to want to believe that it's happening. Some refuse to entertain the notion that the good times might actually last. Many can't seem to forget that there have been many rallies eerily similar to this one that ended up failing — and costing them a lot of money.
Who can blame them? Since peaking in January 2000, the Dow has mustered up five big rallies with gains ranging from 15% to 29%. But they all proved to be short-lived, ultimately reversing course and resulting in new lows.
Is the latest burst likely to fizzle, too? That depends on who you ask.
The Dow's fits and starts A bull market is broadly defined as a 20% gain:
3/11 - Wednesday 13.8% -15.8% Subsequent loss 10/9/02 - 11/27/02 22.6% -19.5% Subsequent loss 7/23/02 - 8/22/02 17.5% -27.6% Subsequent loss 9/21/01 - 3/19/02 29.1% -27.4% Subsequent loss 3/22/01 - 5/21/01 20.8% -16.8% Subsequent loss 3/7/00 - 4/11/00 15.2% Source: USA TODAY research
Former bank employee Betty Olsen, 62, of Dowelltown, Tenn., thinks the postwar rally is the real deal. "This is the beginning point of the market going up," she says.
Then there are skeptics such as Des Stone of Falls Church, Va. He isn't convinced the gains will last and questions whether there's juice left in the rally — even though he wonders if he is being too cautious as he watches tech stocks he owns, such as Sun Microsystems, shoot higher. "The market has a ways to go" before it can shake off its funk, says Stone, 32, who works at an Internet company. "People don't trust the stock market."
But some experts say the problems run much deeper than a question of confidence. "It's not that individual investors believe or don't believe in the latest rally," says Steve Hochberg, chief market analyst at Elliott Wave International. "It's just that there is apathy. The equity culture of the 1990s is dead."
Investors' appetite for stocks remains low after the Wall Street scandals, a bruising three-year bear market and the war. Investors pulled $27.7 billion from stock funds last year, and another $11.1 billion in the first quarter of 2003, according to the Investment Company Institute.
Not even professional investors are certain of which way the market will head. "I can tell you that they are interested in stocks again, but they are not ready to commit," says Tobias Levkovich, institutional equity strategist at Salomon Smith Barney, referring to European investors he is meeting with in Italy.
That lack of conviction shows up in the paltry weightings of stocks in institutional portfolios. Citing a Federal Reserve study, Levkovich says private pension funds had only 41% of their assets invested in stocks at the end of 2002, down from a peak of roughly 50% in early 2000.
But that caution might be subsiding. There has been a subtle, yet important shift in the thinking of big clients as they've watched the market barrel higher, Levkovich says. Clients who were tuning him out a few weeks ago are again willing to have a conversation about raising their stock weightings, which would amount to some serious buying power. "They're willing to listen again," he says.
The bulls' case
Perhaps big investors are listening again because the market is telling the world that there is a brighter future and an economic recovery on the horizon, traders say. Optimists say investors would be foolish not to recognize the growing number of positives now giving the market a boost:
Corporate earnings are growing again. Fears that U.S. companies would suffer another bleak period in the first quarter due to the war's depressive effect on the economy never panned out. Profit growth for the 90% of the companies in the Standard & Poor's 500 index that have reported came in at 13.2% vs. a year ago, up sharply from the 8.5% analysts were expecting on April 1, Thomson First Call says. While second-quarter growth is now projected at a less lofty 6.1%, that has come down only slightly from 7% at the start of April, which is another hopeful sign. Heavy combat in Iraq is done.
While the United States is still trying to win the peace after winning the war in Iraq, much of the uncertainty and worst-case scenarios surrounding the conflict, such as the use of chemical weapons on coalition troops and terror counterattacks, are in the rearview mirror. The belief is the economy, earnings and both consumer and investor confidence will perk up now that the war is ending.
Rising confidence. A steady diet of war talk and a brutal winter put a big-time damper on Americans' outlook. That all changed when the statue of Saddam came crashing down in downtown Baghdad. In April, the UBS Index of Investor Optimism enjoyed its biggest monthly jump since its inception in October 1996, surging to its highest level in 10 months. The mood of consumers has also become more upbeat. In April, the Conference Board's closely watched monthly survey of consumer confidence jumped 32% — the biggest since the end of the Gulf War in 1991.
Better-looking stock charts. "Technical" factors are improving. The number of stocks making 52-week highs is starting to dwarf those hitting lows. Wednesday, even though the Dow slipped 27.73 points to 8560.63, there were 186 stocks making highs and only four lows on the New York Stock Exchange. In addition, for the first time since the bear market began in March 2000, the Nasdaq recently posted both a higher 52-week high and a higher 52-week low, a signal that the long down trend could be over. Aggressive stocks are rallying. The types of stocks that typically do well in the early stages of an economic recovery are doing well. Small-company stocks, for example, are faring better than large-cap stocks. The Russell 2000, a small-cap index, is up 7.1% this year, vs. a gain of 5.6% for the large-cap S&P 500. In April, stocks with market values between $250 million and $2 billion gained 10.1%, vs. an 8.5% gain for giant stocks valued at $20 billion or more, according to Salomon Smith Barney.
Internet stocks are also flying high, which suggests that investors are again willing to take on bigger risks in search of higher returns. The USA TODAY Internet 50 index is up 61.2% from its Oct. 7 bear market low and up 21.8% from its 2003 low hit on March 11.
Give the bears their due
But for every potential positive, there is an offsetting worry. Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray notes that betting on an economic recovery has been a losing strategy. And with analysts still expecting double-digit profit growth in the second half of the year, and still no concrete signs of a full-fledged economic recovery, the likelihood of the rally fizzling is high.
"It's unlikely the market can sustain the type of run it's on," Belski says. "The major upside move is over," at least for now.
There are other bugaboos lurking that could short-circuit the rally. One big potential negative is if the economy falls into a deflationary spiral. On Tuesday, the Federal Reserve said they could not rule that out, although they say the risk remains small. Deflation is a profit killer. "In a deflationary cycle," says Al Schwartz, an analyst at Schaeffer's Investment Research, "businesses have no pricing power, (and) consumers are hesitant to spend because they know prices will be cheaper tomorrow."
The result is that companies fail to hire workers, setting in motion a painful economic spiral. Burdensome debt loads become too much for people to handle, so they sell assets such as stocks and real estate to meet the payments. That, in turn, causes a tumble in prices of stocks, bonds, real estate and other assets.
There are also pundits who argue that stocks are still expensive and must come down further before the pain is ended. One wary expert is Michael Burke, editor of Investors Intelligence. Burke, a contrarian, polls money managers to see if they're bullish or bearish. Contrarians say a high number of bulls spells danger: Everyone who was going to buy has already bought.
Burke counts 55.8% bulls now and 24.4% bears. "Everyone is enthusiastic," he says. In contrast, Burke's poll showed 55.7% bulls and 26.4% bears at the market top in March 2000. That's a big reason why Burke isn't buying into this rally. "Price-to-earnings ratios are still higher now than they were at the top in 1929 and 1987," he says.
Hochberg of Elliott Wave also says this is just another bear market rally. He won't deny it's been a good rally the past few weeks. But the key words are "has been," he notes. His firm has studied every financial mania, from the tulip bulb craze in the 1600s to the 1929 U.S. stock crash to the Japanese implosion that began in the late 1980s.
The key finding: "All manias have one thing in common: They all slide back below their starting point." If the 1990s tech bubble follows the same pattern, there is more pain ahead.
But while few Wall Street experts believe that worst-case outcome is likely, a growing number say the market is headed for a volatile period that will be marked by baby bull markets and baby bears. Despite the sharp ups and downs, the market is likely to go virtually nowhere like it did from 1966 to 1982.
John Bollinger of Bollinger Capital Management calls this "the giant sideways." If that is the case, investors who want to make money must get out of stocks during rallies and get back in during slumps.
Some investors, though, might figure why bother at all. After the October 1987 stock market meltdown, investors yanked cash from stock funds for 17 of the next 19 months. It could happen again.
Ron Banks, a Brockton, Mass., retiree, says the market won't rally strongly until investor confidence is restored, and that won't happen until CEOs found guilty of fraud are jailed. "Everyone knows the stock market is a risk to begin with, but if you suspect that the books are cooked, you say 'I don't stand a chance.' "
By: Adam Shell
While gains are legitimate, there is a heated dispute among investors about what the heady returns might mean for the stock market in coming months. The debate centers around a key question: Does the sizable advance the past seven months mark the final transition to a new bull market, or does it instead signal the beginning of the end for the advance?
Wall Street is at an important inflection point. The market is going up again, but investors don't seem to want to believe that it's happening. Some refuse to entertain the notion that the good times might actually last. Many can't seem to forget that there have been many rallies eerily similar to this one that ended up failing — and costing them a lot of money.
Who can blame them? Since peaking in January 2000, the Dow has mustered up five big rallies with gains ranging from 15% to 29%. But they all proved to be short-lived, ultimately reversing course and resulting in new lows.
Is the latest burst likely to fizzle, too? That depends on who you ask.
The Dow's fits and starts A bull market is broadly defined as a 20% gain:
3/11 - Wednesday 13.8% -15.8% Subsequent loss 10/9/02 - 11/27/02 22.6% -19.5% Subsequent loss 7/23/02 - 8/22/02 17.5% -27.6% Subsequent loss 9/21/01 - 3/19/02 29.1% -27.4% Subsequent loss 3/22/01 - 5/21/01 20.8% -16.8% Subsequent loss 3/7/00 - 4/11/00 15.2% Source: USA TODAY research
Former bank employee Betty Olsen, 62, of Dowelltown, Tenn., thinks the postwar rally is the real deal. "This is the beginning point of the market going up," she says.
Then there are skeptics such as Des Stone of Falls Church, Va. He isn't convinced the gains will last and questions whether there's juice left in the rally — even though he wonders if he is being too cautious as he watches tech stocks he owns, such as Sun Microsystems, shoot higher. "The market has a ways to go" before it can shake off its funk, says Stone, 32, who works at an Internet company. "People don't trust the stock market."
But some experts say the problems run much deeper than a question of confidence. "It's not that individual investors believe or don't believe in the latest rally," says Steve Hochberg, chief market analyst at Elliott Wave International. "It's just that there is apathy. The equity culture of the 1990s is dead."
Investors' appetite for stocks remains low after the Wall Street scandals, a bruising three-year bear market and the war. Investors pulled $27.7 billion from stock funds last year, and another $11.1 billion in the first quarter of 2003, according to the Investment Company Institute.
Not even professional investors are certain of which way the market will head. "I can tell you that they are interested in stocks again, but they are not ready to commit," says Tobias Levkovich, institutional equity strategist at Salomon Smith Barney, referring to European investors he is meeting with in Italy.
That lack of conviction shows up in the paltry weightings of stocks in institutional portfolios. Citing a Federal Reserve study, Levkovich says private pension funds had only 41% of their assets invested in stocks at the end of 2002, down from a peak of roughly 50% in early 2000.
But that caution might be subsiding. There has been a subtle, yet important shift in the thinking of big clients as they've watched the market barrel higher, Levkovich says. Clients who were tuning him out a few weeks ago are again willing to have a conversation about raising their stock weightings, which would amount to some serious buying power. "They're willing to listen again," he says.
The bulls' case
Perhaps big investors are listening again because the market is telling the world that there is a brighter future and an economic recovery on the horizon, traders say. Optimists say investors would be foolish not to recognize the growing number of positives now giving the market a boost:
Corporate earnings are growing again. Fears that U.S. companies would suffer another bleak period in the first quarter due to the war's depressive effect on the economy never panned out. Profit growth for the 90% of the companies in the Standard & Poor's 500 index that have reported came in at 13.2% vs. a year ago, up sharply from the 8.5% analysts were expecting on April 1, Thomson First Call says. While second-quarter growth is now projected at a less lofty 6.1%, that has come down only slightly from 7% at the start of April, which is another hopeful sign. Heavy combat in Iraq is done.
While the United States is still trying to win the peace after winning the war in Iraq, much of the uncertainty and worst-case scenarios surrounding the conflict, such as the use of chemical weapons on coalition troops and terror counterattacks, are in the rearview mirror. The belief is the economy, earnings and both consumer and investor confidence will perk up now that the war is ending.
Rising confidence. A steady diet of war talk and a brutal winter put a big-time damper on Americans' outlook. That all changed when the statue of Saddam came crashing down in downtown Baghdad. In April, the UBS Index of Investor Optimism enjoyed its biggest monthly jump since its inception in October 1996, surging to its highest level in 10 months. The mood of consumers has also become more upbeat. In April, the Conference Board's closely watched monthly survey of consumer confidence jumped 32% — the biggest since the end of the Gulf War in 1991.
Better-looking stock charts. "Technical" factors are improving. The number of stocks making 52-week highs is starting to dwarf those hitting lows. Wednesday, even though the Dow slipped 27.73 points to 8560.63, there were 186 stocks making highs and only four lows on the New York Stock Exchange. In addition, for the first time since the bear market began in March 2000, the Nasdaq recently posted both a higher 52-week high and a higher 52-week low, a signal that the long down trend could be over. Aggressive stocks are rallying. The types of stocks that typically do well in the early stages of an economic recovery are doing well. Small-company stocks, for example, are faring better than large-cap stocks. The Russell 2000, a small-cap index, is up 7.1% this year, vs. a gain of 5.6% for the large-cap S&P 500. In April, stocks with market values between $250 million and $2 billion gained 10.1%, vs. an 8.5% gain for giant stocks valued at $20 billion or more, according to Salomon Smith Barney.
Internet stocks are also flying high, which suggests that investors are again willing to take on bigger risks in search of higher returns. The USA TODAY Internet 50 index is up 61.2% from its Oct. 7 bear market low and up 21.8% from its 2003 low hit on March 11.
Give the bears their due
But for every potential positive, there is an offsetting worry. Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray notes that betting on an economic recovery has been a losing strategy. And with analysts still expecting double-digit profit growth in the second half of the year, and still no concrete signs of a full-fledged economic recovery, the likelihood of the rally fizzling is high.
"It's unlikely the market can sustain the type of run it's on," Belski says. "The major upside move is over," at least for now.
There are other bugaboos lurking that could short-circuit the rally. One big potential negative is if the economy falls into a deflationary spiral. On Tuesday, the Federal Reserve said they could not rule that out, although they say the risk remains small. Deflation is a profit killer. "In a deflationary cycle," says Al Schwartz, an analyst at Schaeffer's Investment Research, "businesses have no pricing power, (and) consumers are hesitant to spend because they know prices will be cheaper tomorrow."
The result is that companies fail to hire workers, setting in motion a painful economic spiral. Burdensome debt loads become too much for people to handle, so they sell assets such as stocks and real estate to meet the payments. That, in turn, causes a tumble in prices of stocks, bonds, real estate and other assets.
There are also pundits who argue that stocks are still expensive and must come down further before the pain is ended. One wary expert is Michael Burke, editor of Investors Intelligence. Burke, a contrarian, polls money managers to see if they're bullish or bearish. Contrarians say a high number of bulls spells danger: Everyone who was going to buy has already bought.
Burke counts 55.8% bulls now and 24.4% bears. "Everyone is enthusiastic," he says. In contrast, Burke's poll showed 55.7% bulls and 26.4% bears at the market top in March 2000. That's a big reason why Burke isn't buying into this rally. "Price-to-earnings ratios are still higher now than they were at the top in 1929 and 1987," he says.
Hochberg of Elliott Wave also says this is just another bear market rally. He won't deny it's been a good rally the past few weeks. But the key words are "has been," he notes. His firm has studied every financial mania, from the tulip bulb craze in the 1600s to the 1929 U.S. stock crash to the Japanese implosion that began in the late 1980s.
The key finding: "All manias have one thing in common: They all slide back below their starting point." If the 1990s tech bubble follows the same pattern, there is more pain ahead.
But while few Wall Street experts believe that worst-case outcome is likely, a growing number say the market is headed for a volatile period that will be marked by baby bull markets and baby bears. Despite the sharp ups and downs, the market is likely to go virtually nowhere like it did from 1966 to 1982.
John Bollinger of Bollinger Capital Management calls this "the giant sideways." If that is the case, investors who want to make money must get out of stocks during rallies and get back in during slumps.
Some investors, though, might figure why bother at all. After the October 1987 stock market meltdown, investors yanked cash from stock funds for 17 of the next 19 months. It could happen again.
Ron Banks, a Brockton, Mass., retiree, says the market won't rally strongly until investor confidence is restored, and that won't happen until CEOs found guilty of fraud are jailed. "Everyone knows the stock market is a risk to begin with, but if you suspect that the books are cooked, you say 'I don't stand a chance.' "
By: Adam Shell