Wall Street Setting Up for Grand Finale?
By Pierre Belec
Reuters
NEW YORK (Sept. 8) - Missed out on August's sizzling rally in stocks? Get ready for what could be Wall Street's grand finale of 2000.
''The year-end rally probably began a month ago,'' says Peter Canelo, U.S. equity strategist for Morgan Stanley Dean Witter.
While people were watching sunsets and downing beers at the beach this summer, the New York Stock Exchange's composite index was quietly carving out new highs.
The Standard & Poor's 500 index, which is a broader reflection of the stock market, bumped up a week ago against its March 24 record close of 1,527.46 after gaining 6.5 percent in August. The Dow Jones industrial average rose 6.6 percent, making August its strongest month so far this year.
The technology-heavy Nasdaq composite index was no slouch. It climbed into the plus column for the first time this year, jumping nearly 12 percent last month.
STILL, THERE ARE RISKS OUT THERE
September has the reputation for being the stock market's worst month. Among the things to watch are scary earnings pre-announcements before the start of the third quarter reporting season.
In the months leading up to the November presidential election, the Street will weigh the candidates' odds of being elected and the impact that their economic visions for the future will have on the economy.
SO WHAT'S GOING ON?
Historically, when interest rates are stable, stocks have gone up, so some investors are breaking out the champagne on signs the Federal Reserve may be through raising interest rates.
Some are looking to the next step, which would be for the inflation-fighting central bankers to start reducing the cost of borrowing money, perhaps next year.
Others have concluded there's less of a danger of inflation now that the economy is slowing after growing at such a fast pace it risked overheating.
The bullish camp is also applauding the great productivity story, which has bottled up inflation. The numbers just keep on getting better.
The government this week revised upward its numbers, saying U.S. workers were more productive than previously thought in the second quarter of the year. This would suggest the productivity gains may continue to neutralize wage increases as far as the eye can see.
''With the Federal Reserve possibly out of the picture for the rest of the year, we think the way has been cleared for a continuation of the stock rally,'' Canelo said.
''By forgoing any change in interest rates (last month), the Federal Reserve signaled to the markets that it is satisfied that economic growth is slowing and inflation pressures may have peaked.''
Fed Chairman Alan Greenspan, a die-hard believer in the 'Old Economy,' is scratching his head, wondering how productivity can keep growing with the economy in a record 10th year of expansion.
Productivity shot up a stunning 5.7 percent between April and June while labor costs fell 0.4 percent from a year ago, allowing Corporate America to make more stuff without incurring higher labor costs.
What's happened is that the proliferation of computers and other cost-saving technologies has turned U.S. companies into the world's most efficient machines in history. Before tech ruled, such as in the '70s and '80s, productivity grew on average by a measly 1.5 percent annually.
''Never before in history has productivity surged so late in an economic cycle,'' says Sherry Cooper, global economic strategist for Harris Bank. ''While some of the rise might be cyclical, the structural improvement is clearly sizable, thanks to the technology boom.''
THE LABOR MARKET CONTINUES TO ASTONISH
''Strong productivity growth took unit labor costs down in the face of the tightest labor market in history,'' Cooper said. ''Unit labor costs' declines year-over-year for the first time in 16 years -- proving that growth accompanied by rising productivity raises living standards with little risk of inflation fallout down the road.''
Investors are betting the economy has slowed enough to keep the inflation-chasing Greenspan from muddying the investment environment with more interest-rate increases. The Fed chief has raised rates six times since June 1999 to head off what he viewed as a serious threat of inflation.
The economy may be slowing but to a rate that remains impressive at an estimated 4 percent, though down from the speedy rate of 5 to 6 percent during the last several quarters.
STOCK MARKET: A LEADING INDICATOR
The stock market has a great track record in foretelling economic upturns, though it's not as good at seeing the flip side. Wall Street has often overpredicted downturns by insisting in locking into a bear market mode, even as the economy clearly showed that it was expanding.
''The next important market move is likely to be up, rather than down,'' Martin Pring writes in Aftermarket Review, a technically-guided investment letter. ''While the long-term is not without risk, a bear market has once again been avoided.''
One of the signals that supports a bullish case is the upside-down indicator, which measures a cumulative running total of the volume in advancing vs. declining stocks.
''It typically confirms the new high in the S&P, so its recent move to a new recovery high is a very positive factor,'' Paring said.
During last year's speculative market fury, old-fashioned Wall Street measures went out the window. The advance-decline line, for example, lost its predictive power as the market moved up steadily while more stocks struck new 52-week lows than highs.
Now, investors are doing their homework. Value stocks are back. People are kicking the tires and looking under the hood before buying. Companies with low Pes are again in demand while the Internet stars are falling like flies after soaring last year, even though most of them had no earnings and little potential for turning a dime, soon.
For the week, the Dow Jones industrial average was down 17.02 points at 11,221.76. The Nasdaq composite index slumped 255.01 to 3,979.32 and the Standard & Poor's 500 index was down 26.13 at 1,494.64. |
