Stage Set for Bulls to Return in 2001
Last updated: 31 Dec 2000 13:50 GMT (Reuters)
By Jan Paschal
NEW YORK (Reuters) - Don't look
now, but the stage is set for the
bulls to run down Wall Street once
more in 2001.
No, they won't kick their heels up
as high or run as fast as they did in
the past five years. But the bears
will be put to sleep sometime in the
first half of the new year and the bulls will rule again,
market experts predict.
Driving the market's comeback will be attractive stock
prices, more money flowing early in the new year,
plus likely lower interest rates and a tax cut to revive
the economy, market strategists say.
"The stock market is about as undervalued as I've
seen for quite some time," said Hugh Johnson, chief
investment strategist for First Albany Corp. "The
broader market, the S&P 500, is about 12 percent
undervalued, which just means on average that
stocks are trading at levels that are arguably cheap."
Not all stocks are cheap, of course, Johnson
cautioned.
But "it's easier to get a rally when stocks are
undervalued," Johnson said. "A lot of investors feel a
lot more comfortable buying IBM and Microsoft at
these levels."
International Business Machines Corp. IBM.N now
trades for about $85 a share, down from its 52-week
high of $134-15/16 and not far above its year low of
$80-1/8.
Microsoft Corp. MSFT.O is trading for about $44 a
share, down from its 52-week high of $119-15/16
and, like IBM, not far above its year low -- in this
case, $40-1/4. Both IBM and Microsoft are among the
30 stocks that make up the Dow average, while
Microsoft is one of the most heavily weighted stocks
in the Nasdaq composite.
2001: "A GOOD YEAR FOR STOCKS"
"It will be a good year for stocks," Johnson said of
2001. "But you're going to need to be good at timing.
I think it will be weaker in the first half and stronger
in the second half.
"The big assumption, of course, is that the economy
only slows, with no recession, and earnings continue
to grow, albeit at a much slower pace."
For every bull whose portfolio got gored in 2000,
Johnson's words are welcome ones, indeed.
For 2000, the Standard & Poor's 500 Index .SPX is on
track to finish about 9.6 percent below its 1999
close. The Dow Jones industrial average .DJI is poised
to end 2000 about 5.7 percent below its close on
Dec. 31, 1999.
The tech-driven Nasdaq Composite Index .IXIC is
closing out the year about 38.6 percent below its
1999 settlement -- and over 50 percent below its
March 10, 2000, record close of 5,048.62 -- making
this the worst year in the Nasdaq's 29-year history.
So why will 2001 be better?
"The headwind the market faced in December -- with
that headwind consisting of tax-loss selling and
(profit) warnings from companies -- is beginning to let
up," Johnson said. "That's somewhat encouraging."
The so-called "January effect," which combines a
year-end rally with a rise in stocks in the first month
of the new year, will help get 2001 off to a good
start, Johnson said. A lot of money will be flowing, in
the form of year-end bonuses paid in January and
funds flowing into (401)k plans and other pension
plans.
All that cash needs some place to go and one of the
most likely places is the stock market, Johnson
pointed out.
"The Federal Reserve will be reducing interest rates at
some point in the first half" of the year, Johnson said.
"Sometime in the first half, the bear market will end
and a bull market will begin," he predicted.
A FRIENDLY FED AND A TAX CUT IN THE WINGS
Anthony Chan, managing director and chief economist
of Banc One Investment Advisors, said policy, shaped
by a friendly Federal Reserve and the Republican
President-elect George W. Bush, will give bulls more
than a helping hand in 2001.
"We've already seen the Fed fast-forwarding to an
easing bias," Chan said.
At the Dec. 19 meeting, the Fed's policy-making
body, the Federal Open Market Committee (FOMC),
"bypassed the 'neutral' directive and went right to an
easing bias," Chan said. "That tells me they're on a
one-way train to easing -- ASAP." An interest-rate
cut could occur before the FOMC's next meeting on
Jan. 30-31 -- if the December unemployment rate is
"north of 4.2 percent and we get a gain below 50,000
in non-farm payroll" jobs for the month, Chan said.
The December employment report is scheduled for
release on Friday, Jan. 5.
Otherwise, both Chan and Johnson expect the Fed
will cut interest rates in January and again in March.
On Jan. 20, George W. Bush, the former governor of
Texas and the son of former President George Bush,
will be sworn in as the 43rd president of the United
States.
A promised tax cut, of course, played a central role in
George W. Bush's campaign for president.
"Possibly, there will be a tax cut, by the middle of the
year," Chan said. "I see the consensus on the tax cut
rising.
"I see it now north of $500 billion, or half a trillion
dollars, that is, the size of the tax cut over 10 years."
Bush has proposed a tax cut of $1.3 trillion and "he
says he'll keep explaining it until people understand
it," Chan added.
"This is very bullish for the overall stock market,"
Chan said, referring to the combination of lower
interest rates and a tax cut. "It's positive for the
economy."
But it won't all be smooth sailing for the stock market,
he warned.
"There will be a tug of war in 2001 between two
forces -- policy and profits," Chan explained. "The
fundamentals, with respect to policy, will improve. We
have positive fiscal policy in the cards. And we have
easier monetary policy ahead."
The reality check will come from Corporate America's
report cards, otherwise known as quarterly earnings
reports.
"We'll see profits growing only 5 percent to 7 percent
for all of 2001, compared with 2000, for earnings per
share of the companies in the S&P 500," Chan said.
That's in contrast with 2000, when "we saw profits
still rising, but stocks were underperforming," he
added.
The torrent of companies warning in 2000, especially
in the third and fourth quarters, that profits and
revenues would be below their own forecasts or Wall
Street's expectations drove stock prices down to new
lows, in many instances.
In 2001, "there's an end in sight to the nightmare.
"We'll probably see a 6 percent to 8 percent gain in
the share prices of the S&P 500 companies in 2001,"
he predicted.
HOW LOW WILL THE FED GO?
It's hard to picture Fed Chairman Alan Greenspan
dancing the limbo. But Greenspan and his merry band
of Fed policy-makers have all but shouted their intent
to loosen up monetary policy in the near future.
"In January, they could go as much as 50 basis
points," Chan said, noting that such a move would
bring the fed funds rate target down to 6.0 percent.
If that happens, Chan predicts the Fed will enact
another rate cut of 25 basis points in March.
"But if they only do 25 basis points in January, then
they'll do 50 in March," Chan said.
First Albany's Johnson said he believes the FOMC will
lower the fed funds rate target to 6.25 percent from
its current 6.50 percent level in January, although
"they might go to 6 percent." He agrees with Chan
that the December non-farm payrolls figure "will be
very important in guiding the Federal Reserve.
"If the economy remains as soft as it is now, then
yes, following up at their March meeting, the Fed will
cut again. By the second quarter, 6 percent will be
the fed funds target."
2001 SHAPING UP AS "A TRANSITIONAL YEAR"
The flip of the calendar to Jan. 1, 2001, will mark the
start of "a transitional year," in Chan's opinion. "The
easing" that the Fed does in 2001 "will impact the
economy the most in '02. And the tax cut will impact
the economy mostly in '02."
Any gains by the stock market in 2001 or 2002 are
likely to "pale in comparison with what we saw in
1995 to 1999," when double-digit gains per year were
the norm.
In 2002, "stock prices will rise in excess of profit
growth," Chan said.
That's because there's usually a lag, often described
as about nine months, between Fed action and the
full impact on the U.S. economy. So it will take until
2002 for the Fed's expected two rate cuts in 2001 to
start showing up in improved earnings and better
stock prices, Chan said. |
