good run down article on WSJ site today
<< Three-Time Loser? Hope
Fades for U.S. Stocks
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
online.wsj.com this is a pay site)
After vowing up and down that U.S. markets wouldn't suffer a three-year losing streak -- something that hasn't happened in a generation -- some Wall Street analysts are starting to bite their nails.
The first half of the year, usually the sweetest period for the market, is winding down. And right now, stocks are poised for a losing hat trick. Meanwhile, a wobbly economy, weak earnings and lousy investor sentiment are big obstacles to the recovery many thought was a certainty.
To that end, some analysts are softening their bullish stances, advising investors to reduce exposure to the U.S. stock market and put more money into bonds, cash or foreign equities.
"The earnings recovery is slower than anticipated," said Mark Keller, chairman of investment strategy at A.G. Edwards & Sons in St. Louis. "We take the view that valuations are not particularly cheap, and they are downright expensive in some parts of the market."
Although it maintains an optimistic stance on U.S. stocks, A.G. Edwards is becoming less aggressive. Earlier this month, it trimmed the equities portion of its short-term asset-allocation model to 65%, a 5% drop. It raised the cash component to 15% from 10% and left the bond portion at 20%.
And it isn't alone in tempering its views. Investors big and small are hopping on the wagon -- with the Dow industrials ending in the red this week for the tenth time in 13 weeks.
Calpers, the nation's largest public-pension fund, foresees "single-digit domestic equity returns" for 2002 and recently said it plans to allocate more money to emerging markets, which it thinks will outperform U.S. equities.
Meanwhile, individual investors are bailing out of stocks. TrimTabs.com's latest research shows that investors pulled out $4.75 billion from stock-based mutual funds June 7-10, and put $270 million into bond-based funds during the same time.
Another strategist to cut his view on U.S. equities recently was Charles Blood of Brown Brothers Harriman, who downgraded his near-term outlook for stocks to "neutral" from "bullish."
Richard Bernstein, chief investment strategist at Merrill Lynch and a bear for the last two years (making his view one of the more prescient on Wall Street), says "the durable, long-term market bottom still appears to us to be somewhere in the future."
• See a calendar of earnings reports and economic indicators scheduled for release during the week of June 17-21.
Despite significant declines in major indexes already this year -- with the Dow industrials down 5.5%, the Nasdaq composite off 23% and the S&P 500-stock index 12.3% below its starting point -- equities are still an expensive proposition, considering how anemic corporate profits remain.
The price-to-earnings ratio of the S&P 500 stands at about 18.9, down from about 21 a month ago, according to First Call/Thomson Financial. Historically, U.S. stocks trade at a multiple that ranges from about 15 to 17 times earnings, according to First Call.
Profits need a strong boost to justify current values.
Indeed, Mr. Keller, of A.G. Edwards, says earnings simply aren't recovering enough to justify as heavy a weighting in stocks as his firm had initially recommended. Moreover, the market is still "in the process of discounting the potential for negative international developments and terrorist developments," he says.
Earlier this year, Wall Street was decidedly more hopeful that profits would shoot higher, giving the market wings, as the economy continued its climb out of a recession. But the economic recovery has been lackluster, and more dismal signs emerged this week with indications that consumer spending -- which makes up two-thirds of all economic activity -- was dropping off.
"There has been a strong consensus ... that the U.S. economy would strengthen through 2002, and that U.S. equity prices and Treasury yields would move substantially higher," says Rory Robertson, an interest-rate strategist at Macquarie Equities in New York. "With equity prices and long-term yields down for the year so far, that consensus is under a bit of pressure. The U.S. economy so far this year has been doing O.K. but not great, while equity markets have had a terrible year."
Naturally, a less-than-impressive recovery hasn't been good for corporate profits, which sank 11.7% in the first quarter and are expected to edge up just 0.9% in the second quarter, according to First Call, which tracks corporate earnings.
Third- and fourth-quarter earnings, on the other hand, are expected to leap 18.6% and 27.7%, respectively.
However, investors don't seem so sure anymore that the economy will support those kind of gains this year, and their investments prove it: bonds have soared lately, pushing the yield of the benchmark 10-year bond to 4.81% from 5.26% in just the last three weeks.
"Investors are becoming increasingly concerned about the economy in general and earnings in particular," said Hugh Johnson, chief investment officer at First Albany Corp. "The consensus is still that the economy will grow 2.8% this year [according to Blue Chip Economic Indicators], but I think a lot of forecasters are becoming very worried about that forecast."
It's understandable, given the mixed economic reports. The markets were hit last week after May's retail-sales report showed an unexpected drop. And the University of Michigan consumer-confidence index tumbled to 90.8 in June; Merrill Lynch said the number will "clearly be taken as a sign that the recovery is faltering," even though it's a volatile reading.
Driving deeper into the recent analyst recommendations, however, an underlying bullishness remains.
Despite his for-the-moment pessimism, Mr. Keller's model change suggests he expects a pickup later this year: the money he recommended pulling from stocks, he put toward cash. "We want to build up cash because we think there's going to be a real opportunity later in the summer," Mr. Keller said
And one of Wall Street's most dead-on strategists as of late, Thomas McManus of Banc of America, sees new opportunities in a more-fairly valued market. "Valuations in the market have improved and investors sentiment has become more cautious," Mr. McManus said. "We recognize these as improvements in the overall equity outlook."
Mr. McManus last week increased his stock-allocation recommendation by 5% -- a somewhat surprising move for someone who's been steadfastly bearish for the past two years. But he's not exactly pounding the table. At 55%, his equities recommendation is still among the lowest on Wall Street.
Write to Erin Schulte at erin.schulte@wsj.com
Updated June 15, 2002 2:13 p.m. EDT
REPRINTS INFORMATION:
To distribute multiple copies of this article, visit the Dow Jones Reprints site.
Return To Top |
