Barron's Abramson: The stock market wound up the week with a spirited rally, the same way, as a matter of fact, that it started out the week. Sandwiched in between were three of those you-just-as-well-could-have-stayed-in-bed sessions that have become rather commonplace this year.
What lit a fire under share prices on Friday and, more to the point, what's likely to continue to provide more than a modest bullish spark in the weeks immediately ahead, anyway, was a combo of fundamentals and sentiment. On the latter score, once you get past the incurable optimists posing as market strategists, the usual Street shills and the rest of the sunshine crew, you discover a fair-sized pocket of pessimism among traders and investment pros. The racy group surveyed each week by Consensus Inc. was only 25% bullish at the last reading (Tuesday) and that's pretty much as bad as it gets. As for the pros, the towering short interest on the Big Board is eloquent testimony to their less-than-sanguine view, even after due allowance is made for the popular new hedging game (and possibly the next big market disaster) of buying converts (lots of leverage here) and shorting the stocks.
More tangibly, the market got a lift from a spate of upbeat news on the economy -- an upward revision in fourth-quarter GDP for one, higher durable numbers, for another -- topped off by Friday's spanking good report from the purchasing managers (whose group is now officially dubbed the Institute for Supply Management; frankly, we preferred their original moniker of "purchasing agents," but that was too descriptive, to say nothing of too humble, we suppose).
By whatever name, the purchasing folks' measure of how well the nation's manufacturing sector is faring broke an 18-month string of decline, leaping to 54%, from 49.9% in January (anything above 50 is a plus; anything below is a minus). Most impressive was that backlogs were up after 21 down months in a row.
Not everything is smoking at the factories; employment continues to drag and prices continue lower, both of which are redolent of an oxymoronic recovery -- a profitless prosperity or a deflationary boomlet. But the thrust of the report, as the stock market swiftly picked up on, was unmistakably bullish. On that score, it wouldn't knock our socks off if next Friday's employment data out of Washington were the source of a fresh bit of cheer, showing an uptick in jobs for February (although, reflecting a bigger labor pool, the unemployment rate might be a couple of notches higher, too).
That the economy is on the mend is indisputable. The Fed has worked overtime to buoy the sagging economy with lavish liquidity and cheap credit. Mr. Bush, aided and abetted by Congress, has pulled out the stops on the fiscal side, the surplus be damned. This twin assault has obviously had some effect, surfacing in the real world in the form of such financial phenomena as sharply reduced interest rates that have kept demand for housing torrid, zero-rate financing that has kept auto sales in high gear, and a spectacular boom in mortgage refinancing that has put money in the debt-laden consumer's pocket. And a word of appreciation is in order, too, for lower gas prices.
Moreover, as Goldman Sachs notes in a recent commentary, tax refunds are surging, spurred by lower rates put in place last year, and a sharp drop in both capital gains and the tax liability that, with mournful certainty, accompanies them. Through late February, according to Goldman, the volume of refund checks issued to individuals was up a sizzling 17% over the same span last year. For John Q., pure and simple, that means a fresh windfall.
But to say the economy is on the rebound, which, in turn, is nurturing an advance in the stock market, is most definitely not to say that happy days are here again for either. If the economy has flashed more oomph and quicker than we anticipated, its prospects remain problematic. If nothing else, replenishment of fiercely depleted inventories should make for a decent spring. And even if circumstances were to somehow warrant it, Mr. Greenspan doesn't have the stomach to raise rates swiftly in an election year, so the monetary climate should remain benign.
You don't have to look too hard, though, to spot the disappointments lying in wait for the recovery out there in the tall grass. Most conspicuously, hopes for a revival of the wild capital investment boom of the 'Nineties are destined to be dashed: the engines of that boom -- the soaring bubble stock market and the mad corporate venturesomeness it fed -- are once-in-a-generation, maybe once-in-a-lifetime, wonders. Capital investment will remain in the shop for repairs for some years still. And the stock-market hangover will be with us for a long, long time.
Even if later this year or early next, we manage to avoid slipping back into recession, the economy faces some rough sledding. That jobs are a lagging indicator and so the lack of them is nothing to be agitated over may be of comfort to economists, especially those who happen to be employed, but it's pretty cold comfort if you're out of work. And absent any big snapback in capital spending, unemployment will remain a sore point for the economy.
And while surfeit, we're glad to note, is not in the consumer's lexicon, he is susceptible to fatigue, both financially and, in a sense, physically (not every garage accommodates three cars, not every pot two chickens). He remains highly leveraged, is light on savings, was scarred by the bear market and, in any case, as we pointed out last week, never enjoyed the returns from the big bull market that were his due.
We think Detroit is slated to slow sharply; that GM is selling for 20 times this year's earnings is symptomatic of the exaggerated expectations for the auto business. Housing, that other great prop that kept the economy from falling into a truly deep hole, looks like the next bubble in the making, but at the least is not likely to furnish much of a shot in the arm on the way up.
In short, we still don't see where the juice will come from for anything more than a modest recovery, once the initial bounce runs its course.
As for the stock market, despite the collapse of Nasdaq and its spiritual kin on the Big Board, the excesses from the bad old days have not yet by a long shot been completely wrung out. Valuations are still more the product of hope and hype than reality and reason. And Enron and the rest of the bumper crop of scandals are apt to have a much more lasting and penetrating impact than Wall Street imagines.
Just to take one instance, should companies be forced to account for issuance of stock options as an expense rather than capitalized on their balance sheets, corporate earnings will take a hit. Ed Hyman reckons that, had this accounting approach been in effect in the 1995-2000 stretch, S&P operating earnings would have averaged 14% less than they did. And while we never underestimate the ingenuity of corporate rogues determined to inflate profits, the fallout from the scandals is sure to bury many of the insidious tricks they routinely used to do so.
Again, we expect this upswing possibly has weeks and a bunch of points to go. But powerful rallies are part and parcel of a big bear market. And we're still in a big bear market. |
