Full steam ahead?
Commentary: Wall St. will look bright in 2002
By Edward Wedbush
[Last Update: 1:10 AM ET Dec. 19, 2001
[Editor's note: Outside the Box is a new CBS MarketWatch.com column featuring commentary from some of Wall Street's most respected thinkers. Edward Wedbush is president of Wedbush Morgan Securities, a full-service financial services firm in Los Angeles.]
LOS ANGELES (CBS.MW) -- With the Federal Reserve Board lowering rates, and the threat of terrorism evidently receding, the prospects for renewed economic growth are much enhanced for the first quarter of 2002.
Of course, Wall Street has already anticipated such an economic rebound, as we have seen broad market averages move up by 20 percent or more, since the lows were breached shortly after trading resumed after Sept. 11.
It should be noted that in the "Wall Street-centric" economy we now have, a rise in equity markets at some point almost becomes a self-fulfilling prophecy. With so many households invested in stocks, when the broad indexes rise, so do feelings of household wealth. That triggers consumer spending and entrepreneurship, which helps fuel the economy.
There are some worrisome spots in the economy, such as the overbuilt telecommunications sector, and the steel industry. Tens of billions of dollars have been poured into making networks to carry Internet, data and voice signals, one of the great building booms of all time. Much of this network today remains "unlit," or unused.
Already, we are seeing the bonds of some telecommunications outfits in default or trading for pennies on the dollar. And back in the Old Economy, America's steel mills appear unable to compete with imports.
The upside of both these industry crises is that consumers stand to benefit. Telephone bills and steel prices will remain under a downward pressure for some time, even if the federal government takes certain actions against imports.
The U.S. economy has repeatedly shown the ability to shrug off sector debacles, such as the Internet meltdown, or even the S&L crisis of the 1980s. Unlike Japan, in America bankruptcy, losses are accepted as a part of life, allowing fresh capital to move into appropriate investments.
But having so recently taken a haircut in tech stocks, investors will remain skittish about that sector for a while, and thus we can expect to see jarring price swings in tech stocks for quite some time. Those swings will tend to increase overall market turbulence, since tech has become such a large part of investor psychology, and the indexes, notwithstanding recent changes in the NASDAQ 100 (QQQ: news, chart, profile) component stocks.
More goods news is that with inflation pretty much caged, Fed Chief Alan Greenspan will not have to fight the devil of rising prices, even while an economy falters, the lamentable situation faced by his predecessor Paul Volcker, in the 1980s. Though Greenspan will likely raise rates a bit when the economy recovers, he still has plenty of room to maneuver, which is good news for equities markets.
Indeed the risk may be not inflation, but deflation in many areas of the economy, such as in land values, commodities, and in most manufactured goods. Of course, tech prices tend to drop year-to-year anyway (witness computing power per dollar spent).
The new oil standard
As we have seen, OPEC and aligned oil nations are fighting rearguard actions to keep oil prices from falling, with only mixed success. Even yet, huge reserves are largely unplumbed in the old USSR, and Iraq's output remains constrained. While regional stability and peace in the Mideast and Asia is now a pipe dream, should stability visit that part of the globe, oil producers would face new obstacles in keeping prices up.
Tame inflation means low interest rates, and easy mortgages are always good news for homeowners and buyers. Favorable interest rates should promote home buying, and homeowners should be able to re-finance at lower rates, freeing up money from the monthly mortgage bill for consumer spending. Housing construction should be strong.
One risk is that of another dramatic, successful terrorist attack on the United States, which would signal that the war on terrorism is not over, and our nation still vulnerable. Of course, assessing the likelihood of this risk is almost impossible.
All in all, many sectors on Wall Street look ripe for appreciation in early 2002. Beaten down tech stocks could rise and companies that treat environmental problems look promising as well. Furniture sales, which tend to contract sharply in recessions, should rebound, aided by the strong housing market.
Some industries are strong both cyclically and on long-term fundamentals, such as pharmaceutical and medical equipment. As much noted, the U.S. population is aging, while at the same time marvelous new drugs and technologies are being introduced to the sector. There should be some huge winners in the medical sector next year.
All in all, after a couple so-so years, Wall Street may look bright again in 2002.
Ibexx |
