A Rebound in Search of a Reason
By GRETCHEN MORGENSON
The New York Times
Tuesday, November 20
Stocks are strutting their stuff again, up 20 percent or more from their September lows. By conventional measures then, the bull market is back. But does it have stamina?.
Stocks are strutting their stuff again, up 20 percent or more from their September lows. By conventional measures then, the bull market is back. But does it have stamina?
The Dow Jones industrial average closed at 9,976.46 yesterday, up 21 percent from its low of Sept. 21. The Nasdaq composite index, rich in rebounding technology stocks, has risen 36 percent in that time, while the Standard & Poor's 500-stock index has gained 19 percent.
Still, this impressive two-month move seems driven less by data signaling an economic recovery than by investors' rush to be on board for the next bull run. Missing a chance to recoup some of their losses in stocks is a much scarier proposition to investors than the prospect of weakness next year in the United States economy and corporate earnings.
Having bid up stocks recently, investors may find anything less than a strong recovery disappointing for their portfolios. "I'm concerned that a big turnaround in the economy is already built into many stocks' prices," said David Eidelman, a money manager at Eidelman, Finger & Harris in St. Louis. "I think there's a good chance that even if the economy does turn around, many companies will have earnings power at the next peak that is well below what they made in the past."
In recent weeks, investors have been gaining confidence that an economic rebound is drawing near and that stocks are the place to be. Echoing Kipling's "If," market strategists have drummed into investors' heads since the beginning of 2001 that gains will come to those who disregard the turmoil around them keeping their heads and focus on better times ahead.
Even though better times are not yet evident, the belief in them is showing up in stock prices. Many stars are in fact now aligned for investors. David Sowerby, chief market analyst at Loomis, Sayles & Company, said: "Inflation is less than 2 percent, the Fed has conducted the most aggressive easing I have ever known in my life, we have tax cuts, more stocks are attractively priced than they were six months ago, and we have one of the strongest financial systems in the history of this planet. All are giving me a green light today."
Even the long dormant market for new stock issues is showing signs of life, as several new stocks posted initial pops in price in the last weeks.
It is not surprising that investors are eager to jump on the stock market train fearing it will leave the station without them. Even though share prices have clawed their way back from deeply depressed levels the last two months, the broad market indexes remain down for the year. The S.& P., for example, has lost 12.8 percent of its value in 2001, while the Nasdaq remains almost 22 percent lower than where it began the year.
Besides, autumn recoveries have become common. During 1998 and 1999, stocks bounced off low levels in October, rising 20 percent and 15 percent, respectively, by the end of the year. The pattern was broken in 2000.
James Paulsen, chief investment officer of Wells Capital Management in Minneapolis, is of two minds on the recent rally. "Part of me says, how often does an equity investor have everybody from the Bank of Japan, the United States Congress, the European Central Bank and the Fed working day and night to get equities up?" he asked. "That's a hugely bullish thing to bet against. I don't disagree we're going to get a bounce and the recession will end, but I wonder how strong the recovery will be."
Mr. Paulsen is particularly concerned about the financial position of American consumers, many of whom have binged on borrowing and now face unemployment. Even though mortgage rates fell a few weeks ago, they have backed up again, reducing the potential savings from refinancings for many consumers.
Nevertheless, stocks of many cyclical companies that investors turn to when an economic downturn is ending have already been bid up to prices that may not be sustainable even if the recovery were to begin tomorrow. Shares in the retail sector and among basic-materials companies have outperformed other groups this year, Mr. Paulsen said. "There is some risk of downside if growth only comes in at 2 percent next year, rather than the 3 percent or more that people are expecting," he said.
Even the bulls acknowledge that the recent rally is probably unsustainable. "The fundamentals are soundly in place for investors," Mr. Sowerby said. "But the stock market can't be this easy. It's not a one-way ticket to wealth. Rather, it's a couple of steps forward and one step back. But at least in this environment, it's more steps forward than back." |
