Fed's Greenspan Holds Keys to Stocks
By Brendan Intindola Dec 9 8:26am ET
NEW YORK (Reuters) - The pop echoing down Wall Street this Dec. 31 will not be champagne corks, many experts believe, but the concluding burst of the U.S. stock-market bubble, stretched after 10 years of almost uninterrupted expansion.
And don't expect these pros to get giddy on year-end bubbly. The buzzwords in the current down market are ``reality'' and ''sanity'' as more sober thinking takes hold after the 1990s technology-stock party came to a costly and sudden end in Y2K.
For 2001, investors can expect little fizz in their portfolios until U.S. Federal Reserve Chairman Alan Greenspan begins to cut interest rates. And that may take a while because the U.S. central bank until very recently was more worried about reining in inflation than about a slowing economy.
``The market is in a bit of a lose-lose going forward, and we think (Greenspan) will delay any easing until well into the New Year,'' said Milton Ezrati, senior economist and strategist at Lord Abbett & Co, with nearly $40 billion in assets under management. ``He has exactly what he wants, and when you have what you want, you don't change things.''
Even if the Fed determines inflation is no longer menacing the system, crimped profit and revenue growth caused by the Fed's recent rate hikes are likely to mitigate any glee about the Fed moving its finger off the rate-hike trigger, money managers say.
Wall Street is more optimistic. Merrill Lynch and Co. Inc. (MER.N), the top U.S. stock brokerage that carries the bull in its logo, this week predicted the U.S. stocks shoulrket is flat over the next three weeks. In 1974, the measure fell 35.1 percent, it worst year ever. The second-worst year was 1973, with a decline of 31.1 percent.
The composite's best performance was last year, when it soared 85.6 percent, boosted by a November-December tech rally. In the final two months of 1999, the composite shot up more than 37 percent.
``You had a period of speculation characterized by euphoria from 1995 to 1999, particularly in 1999,'' said Hugh Johnson, chief investment officer at First Albany Corp. ``This is invariably followed by periods of revulsion characterized by distress.''
The tech mania began to subside, he said, when Wall Street houses began to crack down on how much money they were willing to risk in the form of margin lending to Internet investors.
``The Fed was raising interest rates and the domestic money condition deteriorated. The growth rate of bank lending and money supply -- the stuff that really drives the market and the economy -- slowed,'' he said. ``Individual and institutional investors borrowed money to buy stocks that were overvalued, with dreamer expectations that they would become even more overvalued.''
The benchmark S&P 500, a diversified market measure that is less tech-weighted than the Nasdaq composite, also is poised to finish 2000 lower. Year-to-date, it is off more than 8 percent. It would be the first drop since edging down 1.5 percent in 1994, and only the second decline since 1990.
Assuming the market is flat for the balance of the year, it will be the worst year for the 500 since 1981, when it dropped nearly 9.7 percent.
While there have been pockets of strength in the 2000 stock market -- notably defensive-minded utility, healthcare and energy stocks -- the bears have found a home among Internet and, more broadly, technology shares.
``The markets returned to a sense of normality and embraced time-honored investment principles that were abandoned in 1998 and 1999,'' Ezrati said. ``The market, for reasons that are understandable, became enamored of the 'new economy' that created a momentum inexpecting at least a change in the anti-inflation position that made the Fed raise rates six times, or 1.75 percentage point, since last summer.
Indeed, the market rode a rocket earlier this week, with the Nasdaq rising a record 10.5 percent Tuesday, when Greenspan said the Fed had to be alert to the possibility of ``excessive softening'' in the U.S. economy, hinting that he may be willing to contemplate lower interest rates.
The rally may have been premature.
``You saw a pricing of the recovery (Tuesday) even before you have seen the depths of the downturn. We think Greenspan will start easing, but not until March,'' said Donald Ross, chief investment officer at National City Investment Management Co., which has about $25 billion in assets under management. ``We don't think we have seen the bottom.''
With speculative and momentum investing now out of favor, professional stock pickers say ``concept'' names, like Internet companies, will be of little interest to them unless their financial results are sound.
``Things are going to come back to fundamentals having an important role. There is going to be compression in the higher multiple names,'' said Tom Stevens, senior managing director Wilshire Asset Management, with about $10 billion in assets under management. ``We are closer to a bottom than anything else.''
Stock investors should not pin too much hope on a change of thinking at the U.S. central bank, Lord Abbett's Ezrati said.
``I think the market is kidding itself when it gets enthusiastic about a slowdown that would cause the Fed to ease, he said. ``The (corporate) disappointments that come with the slowdown will counteract'' Fed easing, he added. |
