Looking Beyond Bear Market: Upswing May Be Close
By Nick Olivari
NEW YORK (Reuters) - Investors enduring the longest bear market in almost two decades have begun to anticipate the next bull run, and some say a stock recovery may be sooner and more powerful than expected.
Economic data indicating a turnaround are spotty, but optimists take comfort in a few bullish signs: The U.S. economy did not contract in the second quarter and recent initial claims for unemployment benefits slid.
``We're closer to the proverbial (economic) soft landing than people hoped for,'' said Anthony Chan, managing director and chief economist at Banc One Investment Advisors, which oversees $130 billion in assets.
``We're not likely to go into a recession, this time around inflation is favorable, and the Fed is able to ease rates,'' he said. ``Those factors together are bullish and set up the (stock) market for a rally.''
If the history of previous bear markets -- as defined by a drop of 20 percent in the Standard & Poor's 500 index (^SPX - news) -- is a guide, that spells a strong upswing:
After the 1980-1982 bear market, the last prolonged stock market slide, the index rose 170 percent over five years, and gained 45 percent following the October 1987 crash. In the decadelong rally to February 2000, the index rose 349 percent.
And this time economic growth may have slowed, but there's no sign it has stalled, even though corporate earnings are taking some of the biggest hits in a decade -- down more than 17 percent this quarter.
CYCLICAL STOCKS
Lacking a visible turnaround in the economy and earnings, some investors have postponed buying. On the other hand, the market usually rises before a noticeable pick-up in corporate earnings as investors anticipate economic growth.
``There's a focus on economic news but that's really the rear-view mirror,'' said Gregg Summerville, a money manager with Columbus, Indiana-based Kirr, Marbach & Co., which oversees $500 million. Already more ``people are beginning to bank on some sort of recovery later this year.''
A sign of investor belief the worse is over can be seen in cyclical stocks, whose profits are most closely tied to the economy. Cyclicals are doing better than the broader market, Summerville said. The Morgan Stanley Cyclical Index (^CYC - news), which includes everything from car and farm equipment makers to chemical and courier companies, has gained 12 percent in 2001, while the S&P 500 has dropped 7.5 percent.
The economy is in better shape than past downturns, which should help stocks. The latest bear market is only the second since the 1957 downturn with no inflation threat, enabling the Federal Reserve (news - web sites) to ease interest rates at will, Chan said. And with no recession, that makes this bear market unique.
The S&P 500 index hit a low on April 4, 28 percent below its March 2000 record, marking a bottom for stocks. Technical analysts won't consider the current bear market over until the index reaches 1,323.90, a 20 percent gain from that low.
The index came within 12 points of breaching that barrier on May 21, before slipping back on profit concerns. That slide has made investors cautious about claiming the bear dead, but has not killed off their optimism for sustained market gains.
SIGNS WORST IS OVER
Optimists see many signs the worst is over for the economy, which should spell better days ahead for stocks.
Initial claims for unemployment dropped by 51,000 for the week ending July 21, said Charles Blood, managing director at Brown Brothers Harriman, which broke the trend since January when the number of claims was rising overall.
``If it is accurate, we believe that it would mean that the economy had bottomed,'' Blood said.
Strategists are also seeing some good news in earnings.
Tom Galvin, chief strategist with Credit Suisse First Boston, said if the trend continues, the earnings surprise ratio in the second quarter will be in line with the first, and match the trough in the 1991 recession.
The Commerce Department (news - web sites) reported last Friday the U.S. economy grew 0.7 percent in the second quarter, its slowest pace in eight years. But investors were heartened data did not show a contraction as some analysts feared just months ago.
And growth should accelerate in the third quarter thanks to tax rebates, economists said. Bruce Steinberg, chief economist at Merrill Lynch, told clients he expects 2 percent growth next quarter, 3.5 percent in the fourth and 4 percent in 2002. To be sure, investors and strategists are not expecting to see the strength of the post-recession rally of 1982.
Then the Fed was easing at a faster rate than today, and the Reagan administration had increased defense spending, priming the economy.
``The 1982 recession was sharp and painful but it was followed by massive stimulus as regards the budget and sharp easing by the Fed,'' said Patrizio Merciai, chief strategist with Lombard Odier Group, which oversees $73 billion in assets.
``So from mid-1982 we had one of the best periods ever for equity markets,'' Merciai added, noting that the S&P 500 gained 63 percent from Aug. 6, 1982 to June 24, 1983.
This time around, Merciai sees the S&P 500 trading somewhere between 1300 to 1375 in 12 months, which would mean a gain of just 6 to 13 percent from the current level. |
