Dale,
The article you quoted from is really a bullish article making the point that we have or nearly have bottomed. Here's the whole article:
Sunday April 14, 8:56 am Eastern Time
Reuters Business
'Groupthink' Feeds Street's Skepticism
By Pierre Belec
NEW YORK (Reuters) - Hanging out on Wall Street without a parachute, a lot of investors are agonizing over the sad state of corporate earnings and how hard it is to make money in the stock market.
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A couple of weeks ago, the Street was breaking out the champagne as the Dow Jones industrial average looked set to climb back to the magical 11,000 level on signs the economy is racing back from one of the shortest recessions since World War II. The Dow, the dean of stock market indexes, may now have a better chance of revisiting 10,000, after Thursday's selloff.
The market's mind-boggling volatility shows investors are not comfortable about the market.
But some experts say groupthink, the mentality of folks who would never dare to be different, is fueling all of that skepticism. And, they add that historically, one of the best clues the market may be ready for a breakout is when too many investors are thinking the same way.
``The end of the bear market is characterized by a change in the belief about the wisdom of investing in stocks,'' says Bill Valentine, president of Valentine Ventures LLC. ``I'm not talking about folks pulling money out of the market until conditions improve. I'm talking about investors being tempted to believe that they shouldn't be in stocks at all -- ever.''
A lot of people, he reckons, are near the breaking point after two years of lame stock profits, and watching 30 percent or more of their 401(k) retirement plans go up in smoke since the market imploded in March 2000.
DESPAIR BEFORE THE DAWN
In the first three months of this year, the market continued to be a nail-biting experience for investors who jumped back into the market on forecasts that stocks and the U.S. economy have turned the corner. The lucky ones walked away with a flat return in this year's first quarter as U.S. diversified stock funds eked out a gain of only 0.4 percent.
``Yet, it's consistent with the despair reached in past bear markets, just before they turned around,'' Valentine says. ``A similar feeling prevailed in 1979, but for different reasons. Then it was prolonged inflation and an anemic market and economy. But what is similar is the feeling of despair and temptation to believe that a permanent paradigm shift had occurred, boding poorly for stocks into perpetuity.''
Valentine says that by March 1980 -- seven months after people swore off stocks -- the market climbed aboard one of the greatest bull markets in history.
``The missing element from the stock rallies of the past year has been despair,'' he says. Until we get it, the market can't enter the next bull phase.``
RUBBER BAND EFFECT
``The growing despair won't result in significantly more money being withdrawn from the market, but just enough to sap the market of supply so that marginal increases in demand, driven by a recovering economy, will be met with disproportionate (stock) price increases,'' Valentine says. ``This elastic behavior defines a bull market.''
This may already be happening. Investors' appetite for stocks dropped in February as they put only $4.96 billion in stock mutual funds, down from $20 billion in January, according to the Investment Company Institute, a fund industry group. Looking for comfort, investors sent $10.67 billion in to bond funds, up from $10.47 billion in January.
Light trading volume due to fear of a nasty drop in corporate earnings and new accounting irregularities, as well as the surge in crude oil prices due to the Middle East crisis, have exaggerated the market's gyrations lately.
A SLOW MOTION MARKET BOTTOM?
More stocks in the Standard & Poor's 500 Index have risen than fallen, which Wall Street has traditionally viewed as a market bottoming-out process. In fact, 70 percent of stocks in the S&P 500 have risen this year, compared with 43 percent that gained in all of 2001. In 2000, 54 percent of stocks in the S&P 500 increased in value.
The improved breadth, as it is known, can be a good indication that stocks are showing resilience, says Joseph Lisanti, editor of The Outlook, a publication of S&P.
``The zig-zag action of the market as the economic recovery unfolds in its unruly way may be discomforting at times,'' he says, ``but the economy is growing stronger. Stocks will follow corporate profits higher over the course of the year.''
The other bullish argument is that, unlike in the roaring 1990s when stocks were priced out of this world, based on chaotic expectations of earnings growth and emotional stories as well as vague formulations of risk, today's investors are not buying stocks, regardless of the companies' performance.
In other words, after the bubble burst, investors acquired the capacity to discriminate. They are rewarding the good companies and hammering the bad ones.
More importantly, there is no longer a bullish ``lemming effect.'' People no longer believe, as they did during the bubble years and ``Tulipmania'' of the 1630s in Holland, that they must be fully invested because the market will continually rise.
John Manley Jr., private client equity strategist for Salomon Smith Barney, says there has been a sharp upturn in investors' expectations for the earnings growth of the S&P 500 companies after a 20-month slide. This has often been the springboard for major rallies.
``Such turns are rare, but almost always decisive,'' he says, citing their occurrence in 1982, 1985, 1991 and 1998.
``Those periods were also characterized by concerns about double-dip recessions or inadequate profit growth that ultimately proved to be the fuel of further gains,'' he says.
Perhaps optimism will set in once investors shake off the subconscious tendency to measure the current level of corporate earnings from the highs they reached during the booms of the 1990s and start to look at the companies' performances from the standpoint of the recovery from the lows of 2001.
The flip side of the coin is this: How much of this skepticism is worth believing?
What people will have to realize is that U.S. companies, which are the most efficient in the world, will not keep posting lousy earnings forever. At some point, earnings will improve and investors will awake to see that earnings are pretty terrific, once the numbers are viewed in the context of last year's disastrous results.
``Given all the consternation in recent months about 'inflated corporate profits,' perhaps an investor could be excused for not knowing that, in fact, 2001 represented the worst corporate profit plunge in the U.S. since the Great Depression,'' says Richard Salsman, chief market strategist for InterMarket Forecaster, investment consultants.
The Boston-based firm estimates the per-share earnings of the 500 companies in the S&P crashed by 50.2 percent in 2001.
``That was nearly twice the percentage decline registered in the first quarter of 1992, which was the tail-end of the 1990-91 recession, and it exceeded by a slight margin, the worst percentage decline during the Depression in the early 1930s of 49.3 percent and the 43.4 percent drop in 1938.''
Looking back at other recessions, corporate earnings only dropped by 17.7 percent in the 1982 slowdown and profits shrank by just 14.8 percent during the long recession of 1975-1976.
``History reveals that above-average profit rebounds are likely, though, not guaranteed in the aftermath of such a severe earnings plunge,'' Salsman says.
More good stuff to tuck into your memory bank: The outlook for corporate earnings appears to be improving, based on the smaller number of companies issuing earnings warnings. Thomson Financial/First Call says profits warnings in the first quarter were down 42 percent from a year ago, when stock market bears fed on a huge smorgasbord of nasty results.
For the week, the Dow Jones industrial average fell 80.82 points, or 0.8 percent, to end at 10,190.92. The tech-loaded Nasdaq composite index slipped 13.84 points, or 0.8 percent, to close at 1,756.19, while the broad Standard & Poor's 500 index shed 11.72 points, or 1 percent, to finish at 1,111.01. |
