StocksView: Good news, bad news for Wall Street
(Pierre Belec is a free-lance journalist. Any opinions expressed are those of Mr. Belec.)
By Pierre Belec
NEW YORK(Reuters) - Wall Street has plenty of reasons for head scratching. The Dow Jones industrial average is nearly where it was nine months ago. More troubling, the stock market is heading into a traditionally lousy six months.
"The market has taken to oscillating 9.2 percent either side of 8,150 with rallies halted around the 8,900 level and declines met with buyers around the 7,400 area," says James Dines, editor of the Dines Letter. "The very fact that the market has been so balanced for so long usually means there are plenty of both negative and positive factors, with neither having predominated."
The market's ability to rally is a good thing.
In April, the main U.S. stock indexes posted their biggest gains since the fourth quarter of 2002. The Dow climbed 6.1 percent, the Standard & Poor's 500 advanced 8.1 percent and the Nasdaq composite surged 9.2 percent. Europe's leading stock markets had their best April since 1986.
A SPRING THAW
Investors are slowly warming up to the market, with U.S. mutual equity fund inflows climbing by $10 billion in the last couple of weeks, the largest increase in more than a year.
Better-than-expected corporate earnings in the first quarter suggest the massive restructuring and workforce cuts are finally wringing out some of the late 1990s' excesses. Two-thirds of the companies in the S&P 500 index beat Wall Street's estimates. Many companies may now be poised to profit quickly from an economic recovery.
The dollar is weak. That helps global consumer companies.
The Iraq conflict is over. Crude oil is back down around $27 a barrel -- not far above its price November 2002 before the war story chased money out of stocks and into saving accounts and mattresses.
"When you add up the cash in money market funds, small CDs" or certificates of deposit, plus "savings and checking accounts, you find a record $4.7 trillion sitting on the sidelines, earnings extremely low return," says Don Hays, president of Hays Advisory Group. "This ready available cash is equal to 54 percent of the total value of all U.S. stocks and a huge potential reservoir of buying power when investors do decide to buy stocks."
A SIX-MONTH SLUMP
But there's a fly for every ointment. The worst six months of the year for stocks traditionally begin in May.
Over the last 52 years, a compounded investment of $10,000 between May and October would have produced a loss of $77, compared with a gain of $457,103 when invested between November and April, according to the Stock Trader's Almanac. The returns are based on the S&P's performance since 1950.
The Standard & Poor's Investment Advisory Services' research shows the S&P 500 index during the past 30 years has risen 7.2 percent from November though April, while it gained just 1.0 percent between May and October. The November-April stretch has outperformed the May-October period 70 percent of the time.
Something to worry about: Congress has not passed President George W. Bush's $550 billion tax cut, which could delay the revival of corporate capital spending.
States, which by law can't run up budget deficits, are predicting massive budget shortfalls this year. Fat capital gains taxes from the late 1990s' stock market boom are gone. The only way to cope: Raise taxes or slash spending.
The Federal Reserve's 12 interest-rate cuts since 2001 have not spurred growth. A double-dip recession is possible.
Interest rates at 41-year lows hurt millions of retired Americans who park cash in conservative interest-bearing vehicles. The risk: Seniors will trim spending.
A GRIM JOB OUTLOOK
Jobless claims are high. As more Americans are thrown out of work, consumers will cut spending. In April, companies shed jobs for the third straight month while the jobless rate rose to 6 percent from 5.8 percent in March.
"Despite the speedy resolution of the war in Iraq, the grim outlook expressed by the nation's leading chief executive officers does not augur well for an upturn in hiring this year," says John Challenger, president of Challenger, Gray & Christmas Inc., an outplacement firm.
In the first quarter, 355,795 job cuts were announced, according to Challenger.
At a recent Business Roundtable meeting, the CEOs of the biggest American companies lowered their U.S. growth forecast to just 2.2 percent this year from 2.4 percent in 2002.
"It would not be advisable to bet against these projections, considering these are the decision makers whose companies will largely determine the strength of the economy," Challenger says.
"The fact that only 9 percent of these corporate leaders expect to hire new workers while 45 percent expect to reduce payrolls, is perhaps the most telling sign the job market, and therefore the economy, will be slow to recover."
forbes.com
Good article showing the amount of cash on sidelines. :)
Jack |
