After a Rough Year, Stage Set for Bulls to Return
By Jan Paschal
Reuters
NEW YORK (Dec. 29) - Don't look now, but the stage is set for the bulls to run down Wall Street once more in 2001.
No, they won't kick their heels up as high or run as fast as they did in the past five years.
But the bears will be put to sleep sometime in the first half of the new year and the bulls will rule again, market experts predict.
Driving the market's comeback will be attractive stock prices, more money flowing early in the new year, plus likely lower interest rates and a tax cut to revive the economy, market strategists say.
"The stock market is about as undervalued as I've seen for quite some time," said Hugh Johnson, chief investment strategist for First Albany Corp. "The broader market, the S&P 500, is about 12 percent undervalued, which just means on average that stocks are trading at levels that are arguably cheap."
Not all stocks are cheap, of course, Johnson cautioned.
But "it's easier to get a rally when stocks are undervalued," Johnson said. "A lot of investors feel a lot more comfortable buying IBM and Microsoft at these levels."
International Business Machines Corp. now trades for about $85 a share, down from its 52-week high of $134-15/16 and not far above its year low of $80-1/8.
Microsoft Corp. is trading for about $44 a share, down from its 52-week high of $119-15/16 and, like IBM, not far above its year low -- in this case, $40-1/4. Both IBM and Microsoft are among the 30 stocks that make up the Dow average, while Microsoft is one of the most heavily weighted stocks in the Nasdaq composite.
2001: 'A GOOD YEAR FOR STOCKS'
"It will be a good year for stocks," Johnson said of 2001. "But you're going to need to be good at timing. I think it will be weaker in the first half and stronger in the second half.
"The big assumption, of course, is that the economy only slows, with no recession, and earnings continue to grow, albeit at a much slower pace."
For every bull whose portfolio got gored in 2000, Johnson's words are welcome ones, indeed.
For 2000, the Standard & Poor's 500 Index is on track to finish about 9.6 percent below its 1999 close. The Dow Jones industrial average is poised to end 2000 about 5.7 percent below its close on Dec. 31, 1999.
The tech-driven Nasdaq Composite Index is closing out the year about 38.6 percent below its 1999 settlement -- and over 50 percent below its March 10, 2000, record close of 5,048.62 -- making this the worst year in the Nasdaq's 29-year history.
So why will 2001 be better?
"The headwind the market faced in December -- with that headwind consisting of tax-loss selling and (profit) warnings from companies -- is beginning to let up," Johnson said. "That's somewhat encouraging."
The so-called "January effect," which combines a year-end rally with a rise in stocks in the first month of the new year, will help get 2001 off to a good start, Johnson said. A lot of money will be flowing, in the form of year-end bonuses paid in January and funds flowing into (401)k plans and other pension plans.
All that cash needs some place to go and one of the most likely places is the stock market, Johnson pointed out.
"The Federal Reserve will be reducing interest rates at some point in the first half" of the year, Johnson said.
"Sometime in the first half, the bear market will end and a bull market will begin," he predicted.
A FRIENDLY FED AND A TAX CUT IN THE WINGS
Anthony Chan, managing director and chief economist of Banc One Investment Advisors, said policy, shaped by a friendly Federal Reserve and the Republican President-elect George W. Bush, will give bulls more than a helping hand in 2001.
"We've already seen the Fed fast-forwarding to an easing bias," Chan said.
At the Dec. 19 meeting, the Fed's policy-making body, the Federal Open Market Committee (FOMC), "bypassed the 'neutral' directive and went right to an easing bias," Chan said. "That tells me they're on a one-way train to easing -- ASAP."
An interest-rate cut could occur before the FOMC's next meeting on Jan. 30-31 -- if the December unemployment rate is "north of 4.2 percent and we get a gain below 50,000 in nonfarm payroll" jobs for the month, Chan said. The December employment report is scheduled for release on Friday, Jan. 5.
Otherwise, both Chan and Johnson expect the Fed will cut interest rates in January and again in March.
On Jan. 20, George W. Bush, the former governor of Texas and the son of former President George Bush, will be sworn in as the 43rd president of the United States.
A promised tax cut, of course, played a central role in George W. Bush's campaign for president.
"Possibly, there will be a tax cut, by the middle of the year," Chan said. "I see the consensus on the tax cut rising.
"I see it now north of $500 billion, or half a trillion dollars, that is, the size of the tax cut over 10 years."
Bush has proposed a tax cut of $1.3 trillion and "he says he'll keep explaining it until people understand it," Chan added.
"This is very bullish for the overall stock market," Chan said, referring to the combination of lower interest rates and a tax cut. "It's positive for the economy."
But it won't all be smooth sailing for the stock market, he warned.
"There will be a tug of war in 2001 between two forces -- policy and profits," Chan explained. "The fundamentals, with respect to policy, will improve. We have positive fiscal policy in the cards. And we have easier monetary policy ahead."
The reality check will come from Corporate America's report cards, otherwise known as quarterly earnings reports.
"We'll see profits growing only 5 percent to 7 percent for all of 2001, compared with 2000, for earnings per share of the companies in the S&P 500," Chan said.
That's in contrast with 2000, when "we saw profits still rising, but stocks were underperforming," he added.
The torrent of companies warning in 2000, especially in the third and fourth quarters, that profits and revenues would be below their own forecasts or Wall Street's expectations drove stock prices down to new lows, in many instances.
In 2001, "there's an end in sight to the nightmare.
"We'll probably see a 6 percent to 8 percent gain in the share prices of the S&P 500 companies in 2001," he predicted.
HOW LOW WILL THE FED GO?
It's hard to picture Fed Chairman Alan Greenspan dancing the limbo. But Greenspan and his merry band of Fed policy-makers have all but shouted their intent to loosen up monetary policy in the near future.
"In January, they could go as much as 50 basis points," Chan said, noting that such a move would bring the fed funds rate target down to 6.0 percent.
If that happens, Chan predicts the Fed will enact another rate cut of 25 basis points in March.
"But if they only do 25 basis points in January, then they'll do 50 in March," Chan said.
First Albany's Johnson said he believes the FOMC will lower the fed funds rate target to 6.25 percent from its current 6.50 percent level in January, although "they might go to 6 percent."
He agrees with Chan that the December nonfarm payrolls figure "will be very important in guiding the Federal Reserve.
"If the economy remains as soft as it is now, then yes, following up at their March meeting, the Fed will cut again. By the second quarter, 6 percent will be the fed funds target."
2001 SHAPING UP AS 'A TRANSITIONAL YEAR'
The flip of the calendar to Jan. 1, 2001, will mark the start of "a transitional year," in Chan's opinion. "The easing" that the Fed does in 2001 "will impact the economy the most in '02. And the tax cut will impact the economy mostly in '02."
Any gains by the stock market in 2001 or 2002 are likely to "pale in comparison with what we saw in 1995 to 1999," when double-digit gains per year were the norm.
In 2002, "stock prices will rise in excess of profit growth," Chan said.
That's because there's usally a lag, often described as about nine months, between Fed action and the full impact on the U.S. economy. So it will take until 2002 for the Fed's expected two rate cuts in 2001 to start showing up in improved earnings and better stock prices, Chan said.
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