Stocks: Summer Should Yield Move Upward
Aug 5 10:16am ET
By Kenneth Barry
<<NEW YORK (Reuters) - While the timing of a market recovery is hard to pinpoint, most experts say corporate news will eventually brighten and set the stage for another bull run by stocks.
Although the Standard and Poor's 500 has risen since mid-March, the progress has been small, often marked by volatile swings in recent days as companies reported quarterly financial results, which are emerging as the worst in 10 years.
"We are seemingly taking two steps forward and 1.9 steps back" is how Hugh Johnson, chief investment officer at First Albany Corp., describes the market.
Most of the news currently is dismal. A number of companies have taken large write-offs of investments and goodwill against earnings, and more may do so in the third quarter, as a way to clear the decks for improved earnings growth in the future.
A turnaround in companies' fortunes could take even longer. Market research firm Thomson Financial/First Call projects that U.S. companies will report flat earnings in the fourth quarter, rather than the 12.6 percent growth that was expected just four months ago.
"The pain that is incurred today will turn into a much better profits picture next year," says Ned Riley, chief investment strategist at State Street Global Advisors. Some analysts say businesses may even be cutting back too dramatically.
FIRING ON ALL CYLINDERS
There is more silver lining. Consumer spending and the housing sector are holding their own and keeping the economy from a slide into recession. Eventually, the manufacturing and technology sectors will grow strong and the economy will be firing on all cylinders again. When that happens, the stock market will improve but it won't be spectacular compared to the last bull market which was the most powerful in 50 years.
A telling point of the improvement could come at summer's end in September when companies give advance notice about profits or losses prior to officially reporting for the third quarter.
"The third-quarter warning period, the confession period, in September is going to be very important," said Johnson.
If, as Johnson expects, companies say their quarterly earnings are dismal but not as dismal as they were in the previous quarter -- in other words, the profit-recession has ended -- the stock market should move higher.
Some companies, including software maker Oracle Corp. and mobile phone maker Motorola Inc., have said they believe the worst is over for them, but a lot more big corporate names will have to make similar hopeful forecasts this summer to dispel Wall Street's gloom, says Johnson.
In the meantime, the economy is likely to limp along, avoiding recession with help from the recent federal tax rebate, which Congress passed and is beginning to appear as Treasury checks in taxpayers' mail boxes.
Allen Sinai, chief global economist at Decision Economics Inc., estimates the rebate checks will pump an additional $50 billion of consumer spending at an annual rate into the economy, although the spending from those checks won't give much of an immediate push to stocks.
The downturn has lasted longer than the experts expected, but so far the economy has avoided recession.
Gross domestic product was barely positive in the second quarter, growing by 0.7 percent at an annual rate compared with a year earlier after a 1.3 percent rise in the first quarter. One definition of a recession is that GDP must be negative, or shrinking, for two consecutive quarters.
Consumer spending, which accounts for two-thirds of economic activity, can act as a bridge while other parts of the economy regain strength. "If we can keep the forward momentum of two-thirds of the economy, then manufacturing and technology can stabilize and begin to pick up, " says State Street's Riley.
LOWER TAXES MEAN SAVINGS
What is more important than the rebate checks is the cut in tax rates approved by Congress. U.S. workers have start to see a bit more take-home pay in their paychecks, some of which will go to increased spending and some to increased savings, which can boost stocks.
Because a high proportion of the tax-cut dollars in the 10-year program will go to upper-income Americans who statistically save more than other income groups, a significant portion of the funds will go into stocks.
The beginning of the next bull market is hard to pinpoint. Sinai thinks we will move into one beginning in 2002 and in twelve months the Standard and Poor's 500 and Dow Industrial average indexes will be 10 percent to 15 percent higher than today.
Riley notes that the fourth quarter traditionally is strongest period of the year. In addition, he says stock prices probably will rise in the fourth quarter of 2001 as investors anticipate improvement in the economy in 2002 and buy stocks.
Riley sees stocks providing a return of 9 percent to 10 percent next year as measured by price growth and dividend return. Stocks of small companies should yield slightly more.
So the message is earning above-average returns next year will not be like shooting fish in a barrel as it was in 1995-2000.
First Albany's Johnson advises including consumer cyclicals and financial stocks in a portfolio as these tend to do well in the early stages of a bull market. He mentions Target Corp., McGraw-Hill Cos., Harley-Davidson, Citigroup Inc. and American International Group Inc.
For the week, the Dow Jones industrial average rose 96 points to 10,513, the Nasdaq Composite gained 37 points to 2,066 and the S & P 500 rose eight points to 1,214.>>
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JW: Thanks for the Navallier update....Now, if I just had more extra cash to put into the market...:-) |
