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U.S. Indexes All Headed for a Losing Year: Stocks Outlook
By Josh P. Hamilton
New York, Oct. 1 (Bloomberg) -- The third quarter of 2000 is history, and the three major U.S. stock indexes are on track to finish the year with an annual loss for the first time since 1990.
Eastman Kodak Co. and Apple Computer Inc. said profit would fall short of expectations, sending the Dow Jones Industrial Average, Standard & Poor's 500 Index and Nasdaq Composite Index lower last week.
Even if stocks rally in the fourth quarter, investors probably won't enjoy the 20 to 30 percent gains of the past five years, money managers said.
``The key to whether we're going to end the year in negative territory all revolves around technology,'' said Robert Morris, chief investment officer at Lord, Abbett & Co., which manages $33 billion in Jersey City, New Jersey.
Computer-related and telecommunications companies carry the greatest weight in the indexes, and those shares have fallen since March as profit growth slowed.
The S&P 500, the benchmark used by professional investors to track large companies, fell 1.3 percent in the quarter and is down 2.2 percent for the year. Technology stocks make up 29 percent of the index.
The Nasdaq, which dazzled investors with an 86 percent return in 1999 as technology stocks soared, tumbled 7.4 percent in the quarter and is down 9.8 percent in 2000. Neither the S&P 500 nor the Nasdaq has posted a losing year since 1994.
The Dow, which hasn't posted an annual decline since 1990, rose 2.4 percent for the second quarter as rallies in Boeing Co. and J.P. Morgan & Co. offset declines in Intel Corp., Microsoft Corp. and Hewlett-Packard Co. Still, the Dow is down 7.4 percent this year.
Seven of the average's 30 companies have said third-quarter earnings won't meet expectations, fueling investors' concern that the profit boom is slowing.
Warnings
In the S&P 500, 60 companies have told investors they won't meet forecasts this quarter, up from 37 in the same period last year, according to First Call/Thomson Financial.
Apple shares plunged 52 percent Friday after the maker of the colorful iMac personal computer announced its profit shortfall.
The computer shares in the Nasdaq sell for 94 times earnings for the past year, so any sign of a disappointment sends the shares tumbling. Apple sold for a price-to-earnings ratio of 29 before Friday's decline. Now it's priced at 15 times earnings.
``The expectations built into some of these tech companies' stock prices means they have to hit on all cylinders all the time,'' said National City Investment Management Co.'s Michael Santelli, who helps run the $750 million Armada Equity Income Fund, which is up 1 percent this year.
He's been buying shares of Lehman Brothers Holdings Inc., which even after a 76 percent rally this year sells for 12 times earnings.
Apple unsettled investors when it said September sales were slower than expected for all product lines worldwide and it sold fewer of its new high-end PowerMac Cubes. Sales of new PCs are usually strong to students returning to school.
The $9 billion in market value pared from Apple came a week after Intel told analysts third-quarter sales would be lower than expected, causing a record $91 billion single-day drop in value at the world's largest computer chip maker. The company blamed weak sales in Europe.
Dell Computer Corp. said in August that fiscal second-quarter sales rose more slowly than expected. Dell, which gained 39 percent last year and more than 200 percent annually from 1996 through 1998, is down 34 percent this year.
One drag on earnings growth has been a surge in energy prices that has raised the costs of doing business and cut consumers' disposable income.
Crude oil jumped to a 10-year high in September amid low inventories and concern that world supply would lag demand heading into the Northern Hemisphere heating season. High energy prices also contributed to inflationary pressure in Europe that weakened the European common currency, crimping overseas demand for U.S. technology products.
The euro has lost 24 percent of its value against the dollar since the currency's inception in January 1999, making it more expensive for Europeans to buy U.S. goods.
Bull Market
To be sure, the major indexes are not the entire story for stocks. Mid-sized stocks, utilities and real estate investment trusts have posted above-average returns this year. Some are even benefiting from the very environment that is hurting last year's market darlings.
The S&P MidCap 400 Index is up almost 22 percent in 2000, while the Dow Jones Utilities Average has gained 41 percent and is at a record and the Bloomberg Real Estate Investment Trust Index has gained 17 percent.
``The market has been broadening as people look for other places to invest,'' said Lord Abbett's Morris. ``Small is clearly outperforming large.''
S&P Midcap 400 Index groups enjoying market-beating performance include independent power producers, natural gas utilities and energy drilling firms. They are up 179 percent, 106 percent and 62 percent, respectively, as deregulation and tight energy supplies have sent prices and profit soaring.
Among individual companies, Quest Diagnostics Inc. leads gainers among S&P midcaps. The biggest U.S. provider of medical laboratory tests is up 275 percent this year.
Nvidia Corp., a maker of computer processors for three- dimensional graphics software, holds the No. 2 spot, up 249 percent in 2000.
Waters Corp., a maker of scientific instruments, is third with a 236 percent year-to-date advance.
Last Week
Among companies that announced earnings would fall short of forecasts, Priceline.com Inc., an Internet bidding service, lost 46 percent of its value.
Kodak on Tuesday had its largest drop since the October 1987 stock-market crash and ended the week with a loss of 30 percent.
UAL Corp., the parent of United Airlines, sank 11 percent in the week while Lexmark International Inc., the second-largest maker of laser printers, fell 31 percent.
Bright spots for investors included Procter & Gamble Co., which rose 4.9 percent for the week after the largest maker of household products told analysts it will meet profit estimates this quarter and next.
Summit Bancorp was last week's best performer in the S&P 500, advancing 24 percent. FleetBoston Financial Corp., New England's biggest bank, is in talks to buy New Jersey's No. 1 bank, the Wall Street Journal reported, citing people familiar with the matter.
Federal Reserve policymakers meet Tuesday to discuss interest rates. The central bank raised rates six times in 1999 and 2000, most recently in May.
Reports indicate the economy is slowing enough so that the Fed won't raise rates again soon. Analysts in any case see little chance of a rate change until after the presidential election in November.
Companies whose third quarter ended in September will begin reporting earnings this week. Scheduled to report earnings are PepsiCo Inc. on Wednesday and Alcoa Inc. on Thursday. Alcoa is the first company in the Dow Jones Industrial Average scheduled to report, and the only one for the week.
Investors should ratchet down their expectations, says Santelli of National City.
``If you think 25 percent year after year returns in an economy that grows 4 percent a year are possible,'' then maybe there's more good news to come, said Santelli. More likely, Santelli said, is an annual return to 10 or 12 percent.
``That's not bad,'' he said. ``You double your money every seven years.''
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