Spring Gleaning
SmartMoney.com - Pundit News
Monday April 23, 6:50 pm Eastern Time
By Rebecca Thomas
SPRING HAS SPRUNG! At least that's the message from three of our esteemed pundits.
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<<Lehman Brothers' Jeffrey Applegate, Credit Suisse First Boston's Thomas Galvin and UBS Warburg's Edward Kerschner are cheering the Federal Reserve's surprise decision last week to cut the benchmark federal-funds rate by one-half percentage point for the fourth time in four months. According to our three pundits, it's just what the doctor ordered.
``The enervating bear market of 2000-01 now appears to be finally behind us,'' gushes Applegate. ``Don't fight the Fed. Don't fight a cheap market. Never fight both!'' exclaims Kerschner, our No. 2-ranked pundit, in a note titled ``And It's Still Very Cheap.'' The message from Galvin: Buy cyclicals and technology, sectors that typically see returns of nearly double the broader market following a fourth rate reduction by the central bank.
It's tempting to question such unwavering optimism from this crew. They have, after all, been woefully bullish and wrong before. There's always the possibility that the major equity barometers will resume their downward trajectory as investors lock in impressive profits made over the past two weeks. Although the market, as measured by the Standard & Poor's 500 index, has returned 11% since April 4, stocks have slid broadly south over the past two trading days. On Monday, the Nasdaq Composite lost 104.09 points, the Dow Jones Industrial Average finished down 47.62 and the S&P 500 tumbled 18.62.
These three bulls won't let us rain on their party, though. (For gloom, you'll have to tune in to the likes of Ed Hyman of ISI Group, in the sidebar.) Instead, they insist that investors are taking a quick breather before aiming for the skies again. According to Applegate, the equity market's performance over the past two weeks bears ``uncanny'' resemblance to similar periods in the past, when a strong rebound in stocks preceded the recovery in corporate profits and economic growth. If this resemblance persists, as Applegate expects, the average one-year equity return from the market's trough on April 4 should be ``in excess of 30%,'' he says. (Already, the market has achieved nearly half of that return.)
Indeed, the historical similarities are remarkable thus far. In past periods of dramatic interest rate easing, the stock market has typically bottomed three months after the first cut. During the current easing cycle, the central bank made its initial move on Jan. 3, three months before the market's last trough. Also, equity rallies during turbulent (but not recessionary) economic times tend to be compressed — as appears to be the case this time around — with one-fourth of the one-year return occurring in the first two weeks of the upswing and one-half coming in the first four months. Consider too that industry sectors that have historically underperformed during broad market rallies — basic materials, communications services, consumer cyclicals and staples, energy, health care and utilities — have done relatively poorly since April 4, while sectors that tend to outperform during such upswings — capital goods, financials (particularly investment banks and brokers) and technology (especially semiconductors) — have done relatively well.
To be sure, past performance is hardly a foolproof indicator of the future. It's far better to track contemporary data on profits and the economy. And here, as well, our pundits find reason for optimism. On the corporate front, earnings warnings have dramatically lowered expectations, setting the stage for positive surprises, says Galvin. In the current earnings season, 135 companies (or 57% of the 235 companies in the S&P 500 that have already reported) have posted better-than-expected first-quarter results, while only 31, or 13%, have disappointed. Moreover, Galvin says, investors are increasingly discriminating between the winners and the losers in each industry sector, picking, say, Microsoft (NASDAQ:MSFT - news) over Sun Microsystems (NASDAQ:SUNW - news) and Dell Computer (NASDAQ:DELL - news) over Gateway (NYSE:GTW - news). The CSFB strategist even sees the silver lining in Cisco Systems' (NASDAQ:CSCO - news) dire preannouncement last week. ``The leader of a troubled pack has finally admitted a problem, drawn parameters around the issue and is beginning to regain control of its profit destiny by working down excesses,'' he writes.
A smattering of key economic indicators also suggests to Galvin that an economic recovery is around the corner. New orders are picking up again among manufacturers, signaling the end of the inventory-correction process. And the Conference Board's recently released survey of CEO confidence came in surprisingly strong, reflecting optimism that conditions will improve over the next six months.
Then there's the magic of the Federal Reserve, in which all of our pundits seem to have renewed faith. Galvin, for one, is certain the central bank ``will do everything in its power to get this economy moving.'' And Kerschner's projecting another full point of reductions in the fed-funds rate by the time August rolls around. If that holds true, spring fever could turn into a summer of stock-market love.>> |
