Stocks Get October Treat, Tricks Looming?
By Jan Paschal
NEW YORK (Reuters) - The stock market got an early treat when the Fed left U.S. interest rates alone this week. But it still faces a tricky road before Halloween rolls around on Oct. 31, Wall Street experts say.
October, of course, is traditionally a scary month.
Two of the darkest memories: In 1929, the stock market crashed and ushered in the 1930s Depression. On Oct. 19, 1987, infamous as Black Monday, the Dow Jones industrial average plummeted 22.6 percent -- its biggest one-day percentage decline ever -- and brought Wall Street's party to an end for the next several years.
``October's going to be very choppy,'' said Robert Stovall, market strategist at Prudential Securities. ``You've got the five ``E's'' buzzing around the market -- earnings expectations, which have always been too high, and then earnings warnings, followed by the euro, energy, and the economy, now 10 years old with the recovery, and the election.''
The presidential election on Nov. 7, according to conventional wisdom, is the reason why the Federal Reserve has stood pat on interest rates since its last increase in May.
This year, the biggest scares for stock investors appear to have come and gone, the veteran market watchers say.
Instead of Casper the Friendly Ghost, investors have already seen -- and heard -- a bad news bear with the steady growl of quarterly profit and revenue warnings that began with Intel's bombshell on Sept. 21. Last week, it was Apple Computer's turn. This week, Wall Street got more bad news from more than a dozen companies -- ranging from Old Economy stalwarts like Martin Marietta and Pitney Bowes to New Economy denizens like Dell Computer and Micron Technology.
Add to that the Federal Reserve's warning on Tuesday that high energy prices and a tight labor market mean the risk of inflation still hangs over the almost $10 trillion U.S. economy.
On Friday, the stock market was rattled by more profit warnings and data showing the U.S. unemployment rate in September fell to 3.9 percent -- its lowest level in 30 years, confounding expectations that the rate would stay at 4.1 percent.
Worst May Be Over
``The odds of a meltdown, similar to 1929 or 1987, are very low,'' said Hugh Johnson, chief investment strategist at First Albany Corp.
The only thing that could change that would be some unexpected outside event. In August 1990, Iraq's invasion of Kuwait drove oil prices up into the ozone and roiled markets.
Anthony Chan, managing director and chief economist of Banc One Investment Advisors, said the surprisingly low jobless rate ''raises the risk of tightening,'' or more interest-rate increases ahead. ``But it doesn't guarantee it.''
It's more likely, Chan said, that the employment data ``just postpones the good news,'' which means any talk about the Fed cutting rates will happen later rather than sooner.
First Albany's Johnson said he hopes ``October will not be as bad as September. But I don't think it will be. The big problems we faced in September will continue to be problems, but not as big.''
The twin demons of skyrocketing oil prices and the sinking euro reared their ugly heads in September, forcing many companies to warn that sales and earnings would fall below expectations. Since then, ``the price of oil has come down and the euro has stabilized.''
Oil soared to $37.80 a barrel in September, the highest price since the Gulf War in 1990/91. On Thursday, oil hit an eight-week low of $30.19. The price drop followed the government's decision on Sept. 22 to release 30 million barrels of oil from the nation's emergency reserve over the next 30 days to shore up the supply of heating oil for this winter.
The euro, after plunging to a record low near 84.40 cents against the dollar on Sept. 20, is trading at around 86.88 cents. It has looked a lot healthier since Sept. 22, when the world's most powerful central banks sold U.S. dollars and bought euros to prop up Europe's single currency.
Earnings warnings, Johnson said, ``are always dismal'' and the warning season ``is over now.'' Actual earnings tend to be rosier. Concerns about the growth rate of the economy and earnings remain to ``hang over the market like a dark cloud.''
So what kind of October will it be for stocks?
``Trendless and volatile,'' Johnson said.
Bush Vs. Gore Markets
``November and December could be very strong months,'' said Stovall of Prudential. ``Historically, the fourth quarter has been very good. This has been true ever since the economic recovery began in 1991.''
The outcome of the presidential election will help or hurt different market sectors, depending on whether voters choose the Republican candidate, Gov. George W. Bush (news - web sites) of Texas, or the Democrat, Vice President Al Gore (news - web sites), to occupy the White House.
``If Bush wins, that would scare the bond market,'' Stovall said. ``He keeps repeating his tax-cut mantra. And a tax cut means more spending.''
That, in turn, could renew fears of inflation, which would worry the bond market.
``If Gore wins, the environmental, engineering and waste-management stocks will benefit, and so will Sallie Mae and Fannie Mae,'' Stovall said, noting Gore's commitment to the environment, education and housing.
2001 May Be Better
``It's not going to be a bad year,'' said Banc One's Chan.
``For all of 2000, we don't see the equity market rising by more than 4 percent to 6 percent,'' Chan said. ``I don't think the Fed would have a problem with that.''
Translation: As long as the growth rate of stock prices doesn't exceed the average annual growth of U.S. household income, which has been at around 6 percent the past five years, the Fed won't get alarmed, Chan explained.
By the way, Chan is referring to the broader stock market gauges -- the Standard & Poor's 500 Index (^SPX - news) and the Wilshire 5000 Total Market Index (^TMW - news) -- when he talks about the equity market.
On Dec. 31, 1999, the S&P 500 was at 1,469.25. A gain of 4 percent to 6 percent at year-end 2000 would put the S&P 500 at around 1,465 to 1,493. It closed Friday at 1,408.99, its lowest level since late May.
The Wilshire index, which tracks about 7,000 stocks, includes nearly all stocks traded on the New York Stock Exchange (news - web sites), the American Stock Exchange and the Nasdaq market.
The Wilshire index was at 13,812.67 on Dec. 31, 1999. A gain of 4 percent to 6 percent would push the index up to around 13,668 to 13,931 on Dec. 31. It ended Friday at 13,142.
``Inflation won't be an issue next year,'' Chan said, if oil prices keep dropping. He thinks they will, thanks to more oil from OPEC (news - web sites) and the Strategic Petroleum Reserve.
Utilities, health care, financial services, energy and industrials are good places to invest at least some money now because those sectors do the best when the Fed is done raising rates, Johnson said. Chan likes financial stocks.
Is the Fed through with interest-rate increases?
``They're probably done,'' Chan said, when asked if Friday's jobs report had changed his view. But ``if oil revisits $35 a barrel, God forbid...then we may talk about the Fed tightening again.''
Tax-Driven Selling At Year End
First Albany's Johnson believes more tax-driven selling will occur in December.
``This year, investors have a strange mix of gains and losses,'' Johnson said. ``They have gains from previous years. And this year, they have losses.
``So we'll see a lot of tax-driven selling -- selling stocks at losses and using the losses to harvest gains'' elsewhere in investors' portfolios, he explained.
``Let's say there's an individual with a big gain in Qualcomm. They don't want to sell it and have a big capital gain'' to pay tax on. ``This year, maybe they have a loss in P&G or Gillette. So they'll sell P&G or Gillette at a loss and use the loss to offset the gain in Qualcomm. So you have no tax on the capital gain. It's a wash.''
This year-end selling probably won't have that much impact on the market, as investors will ``probably turn around in 30 days and reinvest in some of the stocks they sold.''
So where does Johnson see stocks on Dec. 31? He's sticking with his previous forecasts: Dow at 11,000, S&P 500 at 1,500 and Nasdaq at 4,400, adding he's ``too high on Nasdaq.''
On Friday, the Dow Jones industrial average (^DJI - news) fell 128.38 points, or 1.20 percent, to close at 10,596.54. For the week, the Dow was down almost 55 points, or 0.50 percent. The tech-driven Nasdaq composite index (^IXIC - news) slid 111.09 points, or 3.20 percent, to finish Friday at 3,361.01. For the week, the Nasdaq was off almost 312 points, or 8.5 percent.
(Pierre Belec is on holiday. Any questions or comments on this column can be sent to jan.paschal(at)Reuters.com.) |
