It's turning out to be a bearish January!
January 27, 2005
MARKET PLACE
2-Day Rally Aside, It's a Bearish January
By JONATHAN FUERBRINGER
Profits this earnings season are better than expected so far, but have not been able to pull stocks out of a new year slump.
Even though stocks have climbed the last two days, there are plenty of signs that the market may stay in the doldrums for a while.
The negatives for stocks include surprisingly weak investment flows into stock mutual funds so far this month and oil's refusal to fall much below $50 a barrel. The threat of rising interest rates and the threat of a resumption in the decline of the dollar are problems, as is a sense that investors may have been overly bullish at the end of last year.
"It's not a combination that gets individual investors excited when oil and interest rates go up and the dollar goes down," said Bob Froehlich, chief investment strategist at Deutsche Asset Management. "It is not going to be easy this year."
The major market indicators are still firmly in the red for this month, which is not a good sign for the rest of the year.
Since 1945, the Standard & Poor's 500-stock index has had 21 down Januarys while the Dow Jones industrial average has had 19; in about two-thirds of the cases, a negative January was followed by a down year.
To be sure, some investors are confident that healthy prospects for corporate earnings and for the economy this year will soon turn the market around.
Henry Herrmann, chief investment officer at Waddell & Reed, said he was betting that an economy growing at about a 3.5 percent annual rate would keep corporate profits rising. "Stocks will follow," he said. "I don't think January is a good indicator of where we will end up."
The start of a turnaround might have been sighted on Tuesday and yesterday, when the S.& P. 500 rose a combined 0.9 percent and the Dow 1.3 percent. Yesterday, the Dow rose 37.03 points, or 0.4 percent, to 10,498.59, while the S.& P. 500 climbed 5.66 points, or 0.5 percent, to 1,174.07. The Nasdaq composite index rose 26.14 points, or 1.3 percent, to 2,046.09.
But the rally may also prove to be just a rush to buy when a lot of stocks have become cheaper. For January, the Dow is still down 2.6 percent while the S.& P. 500 is off 3.1 percent. The Nasdaq composite index, heavy with technology stocks, is down 6 percent.
"It's early in the year, and there is not enough evidence out there to give people a strong conviction," Mr. Herrmann said.
The lack of conviction is evident in both the withdrawal of money from domestic stock mutual funds and in the sell-offs that have occurred even in stocks with good fourth-quarter earnings and positive outlooks for this year.
Americans are taking money out of stock mutual funds at a rapid rate, considering that January is typically a month when money pours into these funds. Through Jan. 19, investors have pulled out a net $3.2 billion from mutual funds that chiefly buy American companies, according to AMG Data Services. In January 2003, the last time the market was down for the first month of the year, there were net inflows of $897 million for the entire month.
What money is going into equities is being aimed at foreign stocks, as American investors hope to increase their returns if the dollar falls further against the euro, yen and other currencies this year. There was a net inflow into international funds of $2.5 billion through Jan. 19, although the dollar has risen so far this year.
Strong corporate earnings are not helping stocks, either. I.B.M. surpassed expectations for earnings in the fourth quarter and said it would meet or exceed forecasts for this year. But its stock has dropped 3.1 percent since it reported Jan 18.
Intel has also suffered, with its stock down 0.5 percent since it reported Jan. 11, although it said there was strong demand for its chips and it was upbeat about this year. EBay stock has plunged 20.1 percent since it missed fourth-quarter forecasts by just a penny a share.
Over all, earnings for the fourth quarter are expected to rise 16.9 percent, up from a 15.1 percent estimate before the reporting season began, according to Thomson Financial. The forecast for the first quarter has been trimmed to 6.9 percent from 7.7 percent, but the quarterly forecasts for the rest of the year have slipped only slightly.
Some analysts say the market is expensive, citing the price-to-earnings ratio, which is higher than the historical average. At the end of December, the P/E ratio for the S.& P. 500 was 20.54, using 12-month trailing earnings, according to Ned Davis Research, compared with an average for the last 25 years of 19.5 percent.
But with the stock market's decline this year, the ratio is now 19.9. While that is still slightly above the average, it is less than half of the peak of 46.5 in December 2001.
In addition, Tim Hayes, global equity strategist at Ned Davis Research, said that stock valuations look even better because interest rates are so low. "As long as interest rates remain low, current valuations are not that unattractive," he said.
Still, it has not helped, said Mr. Hermann of Waddell & Reed, that some Federal Reserve policy makers, according to the minutes of the Dec. 14 policy meeting, are worried about inflation, while others are not.
Fed policy makers meet next Tuesday and Wednesday, with analysts expecting another increase of a quarter of a percentage point in the federal funds rate, to 2.5 percent, the sixth consecutive increase since June. Investors will be looking for new signals of how deep the central bank's inflation worries are and whether interest rates could begin moving up faster than now expected.
And it may be that the stock market has just tripped up on its own bullishness, which was born in the post-election rally that turned a bad year for stocks to a good year.
At the end of the year, the ratio of bulls to bears among the investment newsletters followed by Investors Intelligence, a research firm, was just over 3 to 1, down from 3.2 to 1 on Dec. 24. When so many investment advisers are saying the outlook is great, many analysts interpret the index as a contrarian indicator, meaning that the stock market was vulnerable to a sell-off.
Those year-end readings were the highest since the end of June and the beginning of July, and they were followed by a 6.2 percent drop in the S.& P. 500 index to its low for 2004 and a 5.4 percent fall in the Dow.
It also appears that many investors, especially hedge funds and big institutions, just piled into the market at the end of the year to improve their return for 2004 and then decided to cut their risk once the new year began, Lazlo Birinyi of Birinyi Associates said.
Through yesterday, the technology portion of the S.& P. 500 index was down 6.3 percent for the year, giving up almost all of its post-election gain, while the telecommunications portion was off 6.8 percent, a little more than its post-election gain. Five of the other eight sectors were down, with only energy, up 1.1 percent, well into the black. Consumer staples are up just 0.3 percent and utilities 0.2 percent.
"From an earnings perspective, I would have expected the market to be up 5 percent," said Mr. Froehlich of Deutsche Asset Management. "But it is the emotional issues that are driving the market right now."
Treasuries Are Mixed
By Reuters
Short-term Treasury securities were mixed yesterday after an auction of two-year notes drew only modest demand, particularly from indirect bidders. The benchmark 10-year note stayed flat at 100 14/32, leaving the yield at 4.19 percent. The 30-year bond rose 10/32, to 110 21/32, with a yield of 4.66 percent, while the five-year note fell 3/32, to 99 17/32, with a yield of 3.73 percent.
The sale of new two-year Treasury notes went at a high yield of 3.245 percent, disappointing traders. The notes drew bids for 2.01 times the amount on offer, just beating the modest 2.00 achieved at the last sale and below last year's average of 2.2.
Primary dealers were saddled with the bulk of the issue, taking down $16.12 billion, while indirect bidders - including customers of primary dealers and foreign central banks - picked up just $6.86 billion, or 28.6 percent of the total. That compared with an already modest 33 percent at the last sale and was the lowest since August 2003.
"In the absence of aggressive intervention moves from foreign central banks, particularly in Asia, we're likely to see this number come in low rather than high," said Alex Li, interest rate strategist at Credit Suisse First Boston.
Here are the results of the auction of two-year notes:
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