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Major Indexes' Results Look Even Worse Beneath Surface
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
On the surface, the performance of the major stock indexes looks pretty mediocre. And beneath the surface, in some ways at least, it looks even worse.
The broad Standard & Poor's 500-stock index, for instance, is down about 7% so far this year, but it still is up more than 10% since the dark trading days that followed the terrorist attacks last fall. A look inside the index, however, is more disheartening.
More than one stock in six, or about 18% of the entire index, is down not just for the year, but actually has fallen below the panic lows hit in late September.
That is a stunning number. Recall that the mood after Sept. 11 was one of fear and, for some investors, despair. Many experts were warning of a deep, lasting recession. Fears of more terrorist attacks were widespread. A stock-market retreat was said to be in the cards.
But then, in the months that followed, the outlook became less gloomy, the economy moved out of recession, and all of the major stock-market indexes recovered. The Dow Jones Industrial Average, for instance, is up 21% from its Sept. 21 low.
Yet the pressure lingers for investors in a surprising number of big, bedrock U.S. companies such as International Business Machines, Corning and Merck. The inability of such big-name companies to hold on to their gains from last autumn reinforces the view that these stocks -- and perhaps a swath of the entire market -- are caught in a down cycle that they could have trouble shaking. That could serve to put off, again, hopes for a broad market recovery to match the budding rebound in the economy.
IBM is down 11% since Sept. 21, Corning skidded 48% and Merck is off 13%, according to a study by money-management group Birinyi Associates in Westport, Conn.
These companies aren't just odd exceptions. Of the 26 telecommunications stocks in the S&P 500, 20 are below their Sept. 21 levels. Those include Baby Bells such as BellSouth, Verizon Communications and SBC Communications, as well as AT&T, Sprint, Ciena, Qualcomm, JDS Uniphase and Lucent Technologies.
All the energy pipeline stocks are down, which isn't all that surprising since the group features names such as Dynegy and El Paso.
But seven of 19 software firms have fallen further since Sept. 21, including Oracle and Citrix Systems. Six of 15 computer-related stocks are down, including Sun Microsystems, Gateway, EMC and Electronic Data Systems.
Companies outside those areas are holding up much better. All three airlines in the S&P 500 still are up from Sept. 21. The same is true for the apparel makers, all the car makers, all the auto-parts companies, all the defense firms, all the banks, all but one of the financial-services concerns, all the chemicals businesses, all the paper companies, all the machinery makers and all but two of the retailers and the oil companies.
While it won't surprise investors that, say, technology and telecommunications stocks are in trouble, the scale of the drop is remarkable considering that some of these stocks put in huge gains, which they now have entirely given back. As recently as the end of January, for instance, Oracle was up 60% from Sept. 21. Now it is down 27%. Gateway had been up 70% in January and Sun had been up 75%. Both have given back all those gains and more, with Gateway off 11% and Sun down 13%.
All but one of the five biotechnology issues in the S&P 500 are down, including Amgen and Biogen. The group's lone gainer is Immunex.
But the casualties aren't just the tech highfliers. Perhaps most surprising, eight of 15 pharmaceutical and drug-related stocks in the S&P 500 have sunk below their Sept. 21 levels, including Pfizer, Eli Lilly, Bristol-Myers Squibb and Cardinal Health.
For the tech firms in particular, the problem isn't what has happened since Sept. 21; it is what hasn't happened. "We haven't seen any indications that corporate capital spending has picked up," says Robert Armknecht, who manages the Galaxy Equity Growth Fund at Columbia Management Group, FleetBoston Financial's mutual-fund group. "You add to that the fact that without earnings, these stocks are very expensive, and people say, 'I don't think I need to rush.'"
Many investors have "singed fingers," he adds. These people bought stocks during the unexpected optimism of last fall, when some investors wrongly thought the recovery was right around the corner, only to see their purchases decline in value.
"Mark Twain said a cat never sits on a hot stove again twice -- and it doesn't sit on a cold stove again either," Mr. Armknecht notes.
Yet he is optimistic about the outlook and thinks that some of the sharp declines could represent a buying opportunity. Mr. Armknecht and some other pros think the S&P will turn around once corporate profits show some signs of strength and finish the year with a gain. If they are correct, the broad index could be up 15% or more from here, with some sharp gains coming in some of the stocks that have been abandoned.
But that assumes an economic recovery that is robust, and not everyone is convinced that it will be.
"While we expect the economy to avoid a double-dip [recession], we also believe the recovery will develop slowly," warns James Paulsen, chief investment officer at Wells Capital Management, Wells Fargo's money-management arm.
That kind of dour view is what has dominated the equities market for the past week, and indeed, for the past month and most of this year. Stocks already were down when May began, and the broad indexes essentially treaded water during the month. Friday's end-of-month bounce left stocks little changed both for the week and for May. The Dow Jones Industrial Average was down 1.77%, or 179.01 points, for the week, at 9925.25, despite edging up 0.14%, or 13.56 points, on Friday. It was in effect unchanged for the month, off a slim 0.21%.
The S&P 500 was down 1.54% last week and down 0.91% for the month, while the Nasdaq Composite Index, full of tech names, fell a heftier 2.75% on the week and 4.29% on the month.
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-- Robert O'Brien
Write to E.S. Browning at jim.browning@wsj.com
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