Wall St. Dream: A Vacationing Bull
By Pierre Belec
NEW YORK (Reuters) - The best thing that could happen this summer is for the bull to take a vacation from Wall Street.
In fact, experts say investors should pull the plug on those stock market gurus on cable networks and head for the beach.
The Street now reckons that the nation's economy is finally settling down after being slapped by six interest-rate increases by the Federal Reserve since June 1999.
The Fed has boosted the cost of home mortgages, car loans and credit card fees to weaken demand and thus ease pressure on the price of goods. The monetary tightening, in turn, has triggered a bone-jarring drop in stocks, particularly the Nasdaq composite index, which went into a freefall of nearly 40 percent this spring.
But, proving again that things are never the way they seem, the stock market rocketed a week ago on the bad news that unemployment rose in May, retail sales fell, personal income was flat and manufacturing activity slipped.
Investors bought stocks because, in their view, the bad news is actually good.
Their thinking goes this way: As the economy slows, the lower the risk that the Fed will again raise interest rates. The betting is that the central bank will pass on a rate boost at its June 27-28 policy-setting meeting.
Others figure the Fed will still be in a rate-raising mode but it will revert to the less shocking 25-basis-point rate increase, which was the pattern before it rattled the market with a pile-driving 50-basis-point hike in May.
Experts say the market's behavior this summer is very important because it will sway the Fed's strategy.
Although Fed Chairman Alan Greenspan has emphatically stated that he is not gunning for stocks, there is no denying that the wealth created by the booming market has been a powerful force in powering the economy to near its 10th year of expansion.
``I'm hoping that there is no summer rally,'' said Hugh Johnson, chief investment officer at First Albany Corp. in Albany, N.Y.
``I worry that the optimism about the Federal Reserve backing off from raising interest rates will drive the stock market up too far, too fast and again at overvalued levels,'' he said. ``When that happens, the market will hit the wall because it would invite the Fed to keep raising interest rates further.''
Economists say it's too early for the Street to break out the champagne and toast the end of the Fed's money squeeze. To reach the conclusion the economy is slowing, simply based on one month's worth of data, is a case of seeing life with rose-colored glasses.
The smart money says: Wait until the Fed's Aug. 22 meeting to see whether the central bank is through raising. By that time, the central bank will know more about the shape of things with a handful of monthly economics reports under its belt.
A jump in stock prices would be risky because it would flip the market back into the high valuation zone, which Greenspan has viewed as irrational.
The best scenario is for stocks to return to their average annual rate of gain of 10 percent, Johnson said.
``At that speed, the Standard & Poor's 500 index could end the summer at 1,510 from today's 1,474 and the Dow at 11,043 from today's level of 10,774,'' he said.
``The best outcome for stocks this summer would be something that is unexciting,'' Johnson said. ``But honestly, what's likely to happen will be a market that is trendless but very, very volatile -- lots of big swings up and down.''
Johnson's advice: Unless you can cope with a hair-raising market, head for the beach. Stocks won't be the place to get rich quick over the next 90 days.
This may be the summer rally to forget. But again, for the past 36 years, summer spurts have been wet firecrackers, compared with the rest of the year.
The parameters of a summer rally are the lowest close in the Dow Jones industrial average in May or June to the highest close in July, August or September, according to the Stock Trader's Almanac.
``Such a big deal is made of the summer rally that one might get the impression the market puts on its razzle-dazzle performance in the summertime,'' says Yale Hirsch, editor of the Stock Trader's Almanac.
``Nothing could be further from the truth,'' said the Wall Street historian. ``Not only does the market rally in every season of the year, but it does so with more gusto in the winter, spring and fall than in the summer.''
Winter rallies have brought average returns of 14.0 percent. The spring has produced a gain of 10.5 percent, and the fall a gain of 10.4 percent. Summer rallies rank last with returns of only 9.7 percent.
``It'll probably be a rough summer for Nasdaq investors, for brokers dependent on trading commissions and for new high-tech firms seeking to raise capital, but not as rough as it was this spring,'' said Richard Salsman, chief market strategist for Intermarket Forecasting in Cambridge, Mass.
The Nasdaq suffered a pounding in the spring as Wall Street acknowledged, after months of denial, that even the New Economy -- the techs and the Internet crowd -- would be slammed by the economy-slowing increases in interest rates.
``The chance of a further 10 percent decline in the Nasdaq is quite low,'' Salsman said.
``The Fed will persist in its current rampage against prosperity,'' he said. ``When Fed officials are done with their temper tantrums and their rate-gouging, there will be better days ahead for the fabulous, high-growth firms comprising the Nasdaq.''
How long before the good times return?
``It's too early to expect a 'final' market trough any time soon, but it probably won't be much longer, perhaps four to five months, before the Nasdaq resumes its secular rise,'' Salsman said.
What sort of rally should Wall street look for?
``If the Fed keeps rates stable in 2001, the rebound should be decent,'' he said. ``A rise of 25 percent would not be out of the question. If the Fed were to cut rates in 2001 -- an unlikely policy -- then the Nasdaq rebound would be more robust still.''
The good news is that the market is still a great discounting machine, having factored in an expected drop in corporate earnings due to the Fed's money policy.
The proof: The Standard & Poor's 500 index, the stock barometer most closely watched by the mutual funds industry because it reflects the health of a broad range of industries, has fallen back to the area where it ended 1999 at 1,469.
``Sure, there's been a lot of market volatility, but since the start of the year, stocks have been discounting a slowdown in the growth rate of the economy and corporate earnings,'' Johnson said. ``The market has done its job very well and has accurately forecast that things would slow.''
Now, there's a little bit of relief that the Fed won't raise interest rates much more because the economic numbers are showing that things are turning down.
What if those negative numbers turn out to be mysterious one-time events and the next monthly reports show the economy is speeding up again?
``It is very possible that the retail sales, personal spending, housing sales and employment numbers were flukes,'' Johnson said.
``Consumers' confidence and their expectations of more good times ahead have remained resilient and this may again be a case of the economic tea leaves not being lined up in the way that we are getting a true picture of how the economy is behaving,'' he said.
The Conference Board said its consumer confidence index, a gauge of future economic activity, rebounded to a four-month high of 144.4 in May from April's upwardly revised flat reading of 137.7.
Some analysts believe the spike in consumer confidence was a wake-up call -- for people who had been forecasting a downturn in activity in the second half -- to revise their numbers upward.
``When confidence is high, spending is even higher, and given the momentum in the economy, it is hard to believe that even the Fed's tightening to date will slow Supertanker America down in such a short period of time,'' says Kathleen Camilli, director of economic research at Tucker Anthony. |
