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Politics : High Tolerance Plasticity -- Ignore unavailable to you. Want to Upgrade?

To: Sharp_End_Of_Drill who wrote (15259)	7/19/2002 11:18:43 AM
From: stockman_scott	Respond to of 23153

Wells Fargo's Sohn: "What If Stocks Don't Recover?" 7/22/02 *** Complete report at this link... drsohn.com Dr. Sung Won Sohn Wells Fargo & Co. (612) 667-7498 July 22, 2002 Economy: What If Stocks Don't Recover? • How would the economy fare if the stock market fails to recover from the current level? ...Better than you think according to econometric model simulations! ... The negative wealth effect is the primary channel through which the stock market influences the economy. ... Both consumer and business spending are hurt by it. ... However, lower bond yields and accommodative monetary policy provide a significant cushion. ........ For example, mortgage and consumer loan rates remain low. ........ Businesses raise capital in the bond market at very attractive rates. ........ The net effect is that economic growth is down by about 1.5 percentage points during the next twelve months, but the economy still grows at an annual rate of 2.5 percent. • The relatively rosy economic outlook assumes that capital spending on everything from computers to pick-up trucks will gain strength. So far consumer spending, inventories and housing have kept the economic ship afloat. In coming months the importance of these sectors on the economy will diminish (chart 1). Therefore, capital spending must materialize to pick up the slack. Fortunately, capital spending---outside of telecom, aircraft and buildings---has begun to rise already. Two-thirds of capital spending come from replacement demand. The replacement cycle for high-tech goods is especially short. Bonds: Tax-exempts As a Safe Haven • Treasuries outperformed most fixed income assets (chart 3). Corporate shenanigans punished Corporates badly. Safe havens, including Tax-exempts and Agencies, fared relatively well. If the crisis of confidence stabilizes, the strong economic fundamentals will push bond yields up. Chairman Greenspan's positive comments on the economy last week raised Treasury yields. After the terrorist attacks, a similar spike in bond yields occurred. • Tax-exempts have been another safe haven yielding healthy returns. During periods of uncertainties, investors tend to flock to municipal bonds. And, the tax-exempt yields on tax equivalent basis are very attractive (charts 3, 4). Once the crisis passes, however, the demand for them tends to wane. The ongoing budget problems at state and local governments also create a risk. Low interest rates are encouraging new issues, increasing supplies. With economic growth, tighter monetary policy will hike bond yields lowering the value of tax-exempts. Stocks: Nearing the Bottom? • Does the market know something we don't? Nobel laureate Paul Samuelson said, " The stock market predicted nine out of the last five recessions.” Historically, the stock market has often been a lagging indicator. ... For example, the economy rebounded before the stock market did in 1982-83. ... It is clear that the economy is expanding nicely. ... In addition, the traditional indicators of the market bottom--- epressed profits, low valuations (outside of tech and telecom), poor investor psychology, easy monetary policy, etc.---are in place. ... The upcoming earnings announcements for the second quarter will be important in reconnecting the stock market and the economy. ........ Fortunately, recent reports have exceeded expectations. ........ Earnings will jump at double-digit rates during the second half of the year. ........ Hopefully, it will draw attention away from accounting irregularities. It is too late to sell. • But can we trust those earnings? Time and patience are needed. History shows that it takes years and sometimes decades for the market to rebound after major market peaks (chart 5). Would new rules or conventions, like the expensing of stock options, depress earnings? The efficient market already should have taken these factors into consideration. In early 1990s, FAS 106 and 109 ---regarding retiree health care and pension benefits--- were adopted forcing companies to take billions in charges. Afterwards, both stock prices and the price-earnings ratio rose. The market is efficient and smart.