Underwhelmed by the Recovery
By Aaron L. Task
Senior Writer-Street.Com
01/22/2002 05:38 PM EST
Evidence is mounting that the long-awaited economic recovery is at hand, as discussed in today's Midday Musings. But while the economy's pending recovery brought hope to investors in the fourth quarter, its presumptive arrival has them heading for the exits. In a nutshell, market sentiment has transitioned from "the economy is going to recover, hooray!" to "the recovery is here, uh-oh."
The large-scale example of "buy the rumor, sell the news" continued today as a stronger-than-expected report on the Conference Board's index of leading economic indicators failed to inspire much buying. Even attempts to put a positive spin on Fed Chairman Greenspan's recent speech proved insufficient to stop the market's recent downturn.
Instead, investors fretted that equity valuations are overly extended for a recovery that seems likely to be modest, helping send the Dow Jones Industrial Average down 0.6%, the S&P 500 down 0.7%, and the Nasdaq Composite lower by 2.5% to its lowest close since Nov. 21.
Now that the recovery is apparently at hand, rather than some mythical future occurrence, investors are being forced to ponder whether it will be strong enough to justify the relatively high price-to-earnings ratios of many stocks. A growing consensus is that it will fail to be.
Some believe that low interest rates and prospects for improved corporate profits justify higher-than-average P/Es. To these investors, a muted economic recovery means 2002 will be only a modestly positive year for stocks -- say, with major averages rising 5% to 10%.
But to others, the combination of a muted recovery and higher-than-average P/Es augurs danger for those long stocks.
"Except for some restocking of inventory, we think there is a profound lack of visible revenue growth engines for the U.S. economy," commented Douglas Cliggott, J.P. Morgan's market strategist.
As have many others, Cliggott argued that it is unlikely consumer spending will accelerate this year after remaining remarkably strong throughout the recession. Simultaneously, he noted business spending on software and computer equipment remains moribund while markets for exporters remain weak. Given that backdrop -- and the fact consensus expectations are for year-over-year S&P 500 earnings growth of 8% in the second quarter and 24% in the third quarter -- "we see a high probability of very large negative [earnings per share] revisions" this year, the strategist wrote.
Cliggott, who admitted being overly skeptical about prospects for fourth-quarter earnings, is one of the few mainstream market-watchers forecasting 2002 will be another down year for major averages.
"Given the current mix of historically high P/E multiples on very ambitious EPS estimates, we think the S&P 500 will decline again this year," he wrote.
Few on Wall Street agree with him, but many are now beginning to question the rosy 2002 forecasts offered by other strategists. |
