The Post: "Bear Sightings on Wall Street"
washingtonpost.com
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>>>Bear Sightings on Wall Street
By Carol Vinzant and Steven Pearlstein
Washington Post Staff Writers
Thursday, March 1, 2001; Page A01
Quietly and largely unnoticed, a major shift has occurred on Wall Street.
After months of optimistic talk -- about how the stock market's bottom had been reached, how the economy would bounce back in the summer and how the the market always goes up when interest rates go down -- large numbers of people are asking the same big question: Has the great bull market of the 1990s finally given way to a bear market?
No one doubts that the technology-heavy Nasdaq composite index, down by more than half from its peak last spring, is residing squarely in bear territory. The daily ticker has now become a series of nonstop announcements from once "hot" technology companies reporting disappointing sales, falling earnings and difficulty raising new capital.
But now, it has gone well beyond Nasdaq and the tech stocks. The rest of the market has been falling as well, seemingly unable to sustain a rally and desperately searching for a bottom, leading to a growing pessimism among many Wall Street professionals.
Rumors that the Federal Reserve Board would cut interest rates this week caused stocks to rally in recent days. But the market fell back down yesterday after Federal Reserve Chairman Alan Greenspan, in congressional testimony, failed to hint of any rate cut. So glum is Wall Street that many market strategists now caution that lower interest rates may only temporarily boost stock prices, because of skepticism that rate cuts can revive profits quickly.
In an economy where stocks play a substantial role in dealmaking, compensation and savings, the repercussions of a deep and broad-based decline in stock prices are likely to be greater than in the past.
A bear market, for example, is bound to affect the behavior of consumers who, for much of the last decade, have relied on the increased value of their stock portfolio as the source of their household savings.
Predicting the stock market can be perilous. There is never a universal view, the majority can be wrong, and an unexpected event can cause investors to switch positions instantly.
But among the fraternity of Wall Street's technical analysts, attention is focused on a number of signals. The Standard & Poor's index of 500 stocks, a popular measure of the broad market, yesterday came within a whisper of falling 20 percent from its all-time high, set last September. By market lore, that is the point when a mere "correction" turns into an official "bear market."
Other signs of problems: The ratio of advancing stocks to declining stocks has been falling for most of the past two years, with only a brief uptick in January. And, for the first time in 19 years, all the major indexes -- the Nasdaq, the S&P and the blue-chip Dow -- have now dipped below their low points for the previous year.
"There's no question we've been in a bear market," said Charles Pradilla, chief investment strategist at S.G. Cowen Securities Corp.
The stock market is wringing out unrealistic growth expectations of recent years, said Christopher Wolfe, equity strategist at J.P. Morgan & Co.
Of course, not everyone on Wall Street agrees.
Ed Kershner, the chief strategist at UBS Warburg, said, "The current climate of fear creates an outstanding buying opportunity."
And Goldman Sachs's famed optimist, Abby Joseph Cohen, said in a recent report that "we view the risk in equities to be that of time, not of notable further declines in price."
In fact, one characteristic of bear markets is that it is nearly impossible to figure out when you're in one until long after it has begun.
Even in the midst of a strong bull market, like that of the 1990s, stock prices can fall for weeks and months at a time as money is shifted from overpriced sectors to neglected ones. On Wall Street, these occurrences are known as "corrections" and are viewed as buying opportunities.
Similarly, bear markets are often punctuated by one- or two-month surges in stock prices that peter out without coming close to recovering all the lost ground.
These "bear-market rallies" are an essential component of the bear-market dynamic, serving to reinforce the pervasive sense of pessimism and gloom.
As the year began, many market gurus were declaring that interest rate cuts by the Fed would put a bottom on the market and provide a platform for a sustained rebound. But as it turned out, January's two cuts gave the market only a temporary boost, leading some to wonder how much the Fed can do.
"Fed rate cuts will not likely alter the corporate earnings outlook in a way that could change the stock market's near-term prospects," said Robert Dugger, a financial markets expert in Washington and a former Fed economist. "To have that kind of effect, the Fed would have to cut rates by hundreds of basis points, which it is unwilling or unable to do."
For months, investors have tried to navigate the market turmoil by buying stocks in what are called "cyclical" companies, which are viewed as relatively safe harbors from the ill winds of recession -- banks and financial institutions, oil refiners, manufacturers of consumer staples and drug companies. But as one company after another stepped forward to warn of slowing sales and falling profits, even those proved vulnerable.
"There is simply no leadership from any sector generating much enthusiasm among the buying public," Don Hilber, senior economist at Wells Fargo & Co., said in his weekly bulletin to clients. Now, said Hilber, too many "sucker rallies" may have taken a toll, driving investors to the sidelines.
Other analysts note that stocks that may have seemed "underpriced" and "oversold" back in January are now relatively expensive compared with the reduced profits they are expected to earn in the coming quarters. The top 100 stocks in the Nasdaq index, for example, now have higher price-to-earnings ratios than they did last fall.
"There is a new economic reality out there that hasn't been fully discounted in terms of stock prices," said Michael Krauss, head of global technical analysis at J.P. Morgan. He predicts a long, slow decline in the price of the big glamour stocks that dominated the bull market of the 1990s, and which by his reckoning remain overpriced today.
The retreat from stocks can be seen on the bond market, where the flight to the security of U.S. Treasury bonds has pushed up the price of the bonds and, as a consequence, pushed down market interest rates.
It can also be gauged by the amount of cash piling up in money-market funds as pension and mutual fund managers wait for signs of a credible rebound in stock prices. According to Merrill Lynch economist Bruce Steinberg, the holdings of institutional money funds have grown at the annual rate of 128 percent during the last three weeks.
"Obviously, portfolio managers are not willing to commit," Steinberg said.
About the only source of continued support for stocks seems to be coming from individual investors.
In February, investors at the online brokerage firm Ameritrade were overwhelmingly buying stocks instead of selling them. Reports filed with the Commodity Futures Trading Commission suggest that individual investors have bet a record amount of money that the S&P 500 index will soon rise.
"Why are they bullish? Because for 19 years stock prices have been rising almost without interruption, teaching them to buy on the dips," said Steven Hochberg, a well-known technical analyst in Gainesville, Ga.
But Hochberg is in the bear camp. "We'll have a couple of rallies between now and then, but we're not anywhere near the lows," he said.
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