FWIW 2:
September 20, 1999
Big Stocks Carry Load
In Weak Broad Market
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
Glance at the glamour stock-market indexes, and the investing picture looks brilliant.
But look closer, and the market's colors are fading fast. Stocks are moving again into what some analysts call a "stealth" bear market -- a period when a few big, strong stocks hold up the indexes that measure the market, but most individual stocks are showing declines.
After another big gain on Friday, the Nasdaq Composite Index, reflecting trading in the huge Nasdaq Stock Market, was up an astonishing 30.87% for 1999. At 2869.62, it is less than 18 points, just 0.6%, off its Sept. 10 record close of 2887.06.
The blue-chip Dow Jones Industrial Average, which rose 66.17 points, or 0.62%, on Friday to 10803.63, had a rotten week despite the Friday rebound. It was off 224.80, or 2.04%, for the week on fears of a Federal Reserve interest-rate rise. But the industrials, too, are having a bang-up year: up 17.67% for 1999, just 4.61% off the Aug. 25 record close of 11326.04.
All the Dow and Nasdaq gains, however, have come on the backs of just a handful of strong stocks. In the broad stock market, Hurricane Floyd might as well have blown through. On the New York Stock Exchange, the average stock actually is down for 1999 -- that means it is worth less today than on Dec. 31, 1998.
In fact, although it isn't reflected in the indexes, some 62% of the Big Board's stocks are below where they started the year. If you own some of them, you are hurting. On Nasdaq, despite that market index's huge overall gains, less than half the actual stocks are up for 1999. If you don't own Microsoft, Intel, Cisco Systems or MCI WorldCom, then you may be excused for wondering whether the huge gains published for the Nasdaq Stock Market are a misprint.
Drug giant Merck is down for the year on the Big Board. So is AMR, parent of American Airlines. So are Coca-Cola and PepsiCo, Bank of America and Wells Fargo. So even is Berkshire Hathaway, the insurance group that serves as the stock-market vehicle of investment legend Warren Buffett.
After nearly five years of a booming, roaring bull market, notes James Weiss, deputy chief investment officer for stocks at Boston mutual-fund group State Street Research, the stock market "is stretched. It is at the upper end of what the economics might justify." It is little wonder that, as price-earnings ratios get to nosebleed heights, more and more stocks are topping out.
Does that mean that the end of the bull market is nigh?
Yes! say the bears. Especially if the Fed keeps raising rates, they say, stocks are toast. Look at the numbers. Most stocks already are singed.
No! say the bulls. "The important thing to remember is that the stock market is not a democracy," insists Laszlo Birinyi, president of research group Birinyi Associates in Westport, Conn. Based on a database going back to 1931, he says, he has found that bull markets have gotten "narrow," or focused on a handful of winners, many times before, without turning into bear markets.
Last year, he says, just 14 stocks accounted for half the 26.67% gain of the Standard & Poor's 500-stock index. In 1982, when the S&P 500 was up 15%, half gain was in 14 stocks. The next year, 1983, the S&P 500 continued upward, gaining 17%, although it slumped in 1984.
Market breadth "is useful descriptive -- wise, because it says that in a market like this you really need to pick stocks. But I would dispute the idea that it is a useful market predictor," he says.
That is one conclusion that both the bulls and the bears have reached: With so many stocks down, you really need to be in the right stocks. And with just occasional exceptions, that up to now has meant big technology stocks. Some day that will have to change, but it hasn't yet.
For all the talk about the small-stock rebound, small stocks look miserable again this year. The Russell 2000 small-stock index hit its record high on April 21 ... 1998. It has rebounded strongly from its depths of October 1998. But since the start of this year it is up just 2.96%, still 11.59% below last year's high.
Value Line publishes an index that reflects what the average big stock has done. The index gives equal weighting to all 1,700 big stocks Value Line follows, regardless of market size. That index also is down compared with April 1998.
Look even at the once-mighty S&P 500. It is weighted for market size, so it strongly favors the biggest, most successful stocks. But it covers a broad range of businesses. And a number of big financial and drug stocks, which once helped propel the S&P 500 ahead, are down for the year. So the S&P 500 is up just 8.64% this year, eclipsed by the Nasdaq composite and by the Dow industrials.
The Nasdaq composite, also weighted by its stocks' market value, owes its big gains to the fact that it is dominated by big tech stocks. Microsoft, with its $480 billion market value, more than offsets hundreds and hundreds of small Nasdaq companies that are down.
The Dow industrials have benefited from being a narrow, blue-chip index, whose 30 members including International Business Machines generally have done well.
"A few big tech stocks have had a big influence in keeping the market up," notes Tim Hayes, global stock strategist at Ned Davis Research, in Venice, Fla. "Even in the Dow industrials, IBM and Hewlett-Packard are the two biggest point gainers this year. In percentage terms, Alcoa is first, and Hewlett-Packard and IBM are two and three."
Unlike Mr. Birinyi, Mr. Hayes considers the narrow market a real threat to the overall bull market's health. He has looked at previous periods when interest rates were rising at a time when indexes were being propped up by a narrow group of stocks, as has been the case this year. In 1998, 1990, 1987 and 1984, indexes at some point took a beating, which generally didn't end until the Fed cut rates.
If the big stocks that are driving the indexes "run into trouble, that would put the indexes back where the average stock is. That is really the risk," he says. And by his calculation, the median stock in the S&P 500 is virtually unchanged, while the median New York Stock Exchange stock is down close to 5% for 1999.
One solution to the current problem, clearly, would be for the Fed to decide that it no longer needed to raise rates. But if interest rates continue to rise, Christine Callies, chief market strategist at Credit Suisse First Boston, told clients last week, look for the number of advancing stocks to get even smaller. "Selectivity is one of the most common equity-market reactions to higher interest rates, growing progressively worse over time," she says.
A.G. Edwards chief stock strategist Stuart Freeman adds in a report, "Laserbeam focus will be critical to the achievement of returns from here."
But Mr. Weiss at State Street Research adds that, in some ways, a narrow market is justified by corporate fundamentals themselves.
"It isn't an automatic sign that the market is in trouble," he maintains. "Until very recently the strongest earnings growth has been in the biggest companies. So there is a fundamental linkage that makes sense. Having said that, there is a limit to the valuations merited even by companies that are delivering the goods. It can reach a level that doesn't look justified. But it is too simplistic to say that the market looks vulnerable here." |
