This article hitting the wires this weekend will not be doing much to help the indexes or trading volume...
A Weather Map for Stocks' Slack Season
April 20, 2002 07:15 AM ET
By Pierre Belec
NEW YORK (Reuters) - "Do-it-yourself" investors, listen up.
The stock market is about to enter a weak season that typically lasts from May to October. It's a pattern that's been fairly consistent for decades. And it sure beats the "scratch and sniff" way of stock picking.
H.D. Brous & Co., a brokerage house in Great Neck, New York, says a $10,000 investment in the 30 stocks of the Dow Jones industrial average since World War II would have returned $11,750 if invested from May to October. But the same $10,000 would have grown to $426,227 if packed in the same stocks from November to April.
The Stock Trader's Almanac says its own seasonal pattern study agrees: The May-to-October period is the least rewarding.
Since 1950, a compounding $10,000 investment between May and October would have produced a gain of only $1,743, while the same amount of money invested from November to April would have generated a whopping $415,890, according to the Almanac.
The odds are that this seasonal investment strategy may repeat itself this year. There is plenty of nail biting over the prospect of higher interest rates, soaring oil prices and the continued gloomy outlook for corporate earnings. Lately, investors have also agonized over the financial health of heavyweights like International Business Machines Corp., General Electric Co., Boeing Co. and Ford Motor Co.
'BIG MONEY' TYPES AREN'T SMILING
The somber mood of market makers may be a sign that things just aren't right on the Street.
Merrill Lynch's latest survey of global money managers showed they were not as optimistic about the global economy and stock market as they were in March.
Fewer said they expect the global economy to rebound, compared with the sampling just a month ago. They were also less optimistic that corporate earnings will make a strong comeback. In March, the money people thought stocks were fairly valued. But now they believe the market is overvalued even after the recent selloff.
What's significant is that fund managers said U.S. stocks no longer offer the best rewards because the potential rebound in corporate profits has already been priced in.
What a difference a year makes. In 2001, the market focused like a laser on the Federal Reserve's mad dash to head off a deep and protracted recession by slashing interest rates to 40-year lows. Now people have come to the conclusion the central bank has finished its money-easing campaign.
For the history freaks, last year's rate cutting was the most aggressive by the Fed since the secular bear market of the early 1930s, which set the stage for the Great Depression.
Federal Reserve Chairman Alan Greenspan this week signaled that the central bank was in no hurry to raise rates, citing uncertainty about how consumer and business spending will hold up later in the year.
But the consensus is that higher interest rates are inevitable. It all comes down to when the inflation-scared Fed will pull the trigger.
The betting is central bankers will leave interest rates alone in May and probably not raise rates at the policy-setting meeting in late June. A reversal of last year's 11 rate cuts may start in August.
Still, there is a possibility that an oil-price shock and flagging corporate earnings may force the Fed to keep its hands off interest rates this year so as not to become part of the problem. In other words, fast-rising oil prices, which would be a drag on the economy, may offset the need to boost the cost of borrowing.
OIL SHOCK
What has happened is that the economic outlook has been altered by the whopping 30 percent spike in oil prices because the Middle East mess threatens to disrupt supplies from the oil-rich region.
A sustained jump in oil prices would boost the cost of doing business for recession-hit companies that are still struggling to get back on their feet, and an inflation cycle would result as companies pass on their higher energy bills.
This, in turn, would threaten the still-young economic recovery, which has been fueled by strong consumer spending. Unlike businesses, higher energy prices are an added tax on consumers, who cannot pass on the rising cost of living.
Salomon Smith Barney estimates that every 1 cent-per-gallon increase in gasoline prices at the pump sucks $1 billion out of the pocketbooks of Joe and Jane Consumer, who have spent wildly on things like homes and cars for the past year, keeping the world's biggest economy afloat.
The power of energy prices to shock the public was seen in March when the steepest jump in oil prices in nearly three years -- to above $28 a barrel -- caused the price tags on goods imported into the United States to climb at the fastest pace in 18 months.
Surging energy prices, which are the most visible to consumers, along with the current upturn in the bond market's interest rates as the Street gears up for Fed tightening, may already be weighing on the economy.
The nation's housing starts plunged in March by 7.8 percent, the biggest drop in two years. The outlook for that key sector is not too promising because building permits, which are an indicator of future activity, tumbled 9.9 percent, the largest fall since February 1990.
So in this world of unknowns, the path of least resistance for stocks may be down as investors continue to view the market as too adventuresome over the next six months.
Investors also are scared by the inability of many economists to get a clear reading on the economy.
MISSING THE BARN BY A COUNTRY MILE
Kent Engelke, capital markets strategist for Anderson & Strudwick Inc., says the degree of errors in economists' forecasts for the economy for the first quarter of 2002 has been astounding.
The crystal-ball readers had all been in agreement that the shortest recession since World War II, which was officially declared to have started in March 2001, would cause the economy to shrink by 0.1 percent. The experts are now forecasting an impressive gain of more than 5 percent, with some predicting the first quarter will be the strongest quarter of 2002. Sticking their necks further out, some say the foundation is being set for even more robust times in 2003.
"The fourth quarter of 1987 was the last period when consensus missed by such a wide margin," Engelke says. "For those who don't recall, most experts expected a recession after the 1987 stock market crash. What happened is that growth increased by 10.6 percent in the December 1987 quarter and by 5.5 percent in the first quarter of 1988."
For the week, the blue-chip Dow Jones industrial average .DJI rose 66.29 points, or about 0.7 percent, to end at 10,257.11, based on the latest data. The tech-laden Nasdaq composite index .IXIC advanced 40.64 points, or 2.3 percent, to finish at 1,796.83, while the broad Standard & Poor's 500 index .SPX added 14.16 points, or 1.3 percent, to end at 1,125.17.
reuters.com |
