msnbc.com
Nov. 22 — Prospects for the economy may have improved marginally in recent weeks, but certainly nowhere near enough to justify the stunning 20 percent run-up in stock prices. Yet many analysts say they believe the current rally has staying power, unlike the multitude of false bottoms that have appeared over the past 30 months of the bear market.
“IT JUST GOES TO SHOW how utterly futile it is predicting short-term market trends,” said Morningstar senior analyst Pat Dorsey.
Given the relative paucity of fundamental good news, the latest run-up carries some of the hallmarks of the “irrational exuberance” of three years ago, especially in technology stocks, which have gained 32 percent since Oct. 9, based on the Nasdaq Composite index.
Battered chip and telecom stocks like Agere Systems, ADC Telecommunications, Atmel and Broadcom all have gained more than 60 percent in the past month, often rising from the ashes of near penny-stock status.
“I’ve been just stunned by how fast the chip stocks have been coming back,” said Dorsey. “I have to wonder how much has been driven by people in there for the trade. It’s not like the fundamentals seem that much better for either the economy or IT demand.”
Yet market analysts can point to several reasons to believe in the current rally, even if it has come too far, too fast.
“This rally is different,” said Tobias Levkovich, chief institutional equity strategist for Salomon Smith Barney. In a note to clients, he noted that oil prices have weakened, trading volume has risen and the bond market has “cracked.” And, he said, investor sentiment has been bolstered by the Republican victory in the midterm elections and some recent positive signs on the economy. He also points out that dividend yields have become increasingly important, with the average S&P 500 yield now at 1.7 percent, compared with a 1.2 percent return on three-month Treasury bills.
“Thus we find that some market participants feel the need to play catch-up in the next few weeks, which may take the market higher, possibly exceeding our year-end S&P 500 target of 1,000,” Levkovich said.
Other analysts pointed to signs of improvement in the geopolitical climate, including increased international cooperation in the U.S. war on terror and growing international support for the hard-line U.S. stance on Iraq.
INSTITUTIONAL INVESTORS KEY
Phil Dow, directory of equity strategy for RBC Dain Rauscher, said the latest market surge reminded him of the end of the 1973-74 bear market, when stock prices turned up far ahead of economic fundamentals.
“I think that the market is anticipating that things will get better,” Dow said. “The news has gotten a little bit better. In general, the worst thing a money manager can do is miss upside, so that puts a lot of pressure on them.”
He and other analysts stressed that the market’s rally is being driven by institutional investors who feel they have to jump on the train, rather than retail investors who historically remain cautious until about six months after a market bottom.
“Some of these managers have found they are underweighted in equities,” said Jim Volk, managing director of equity trading at D.A. Davidson & Co. “The bond market is not the place to be in terms of rate of return, the consumer is still spending, therefore they might as well be in equities.”
And assuming the economy picks up momentum sometime next year, fund managers will be well-positioned.
Of course, it still takes a bit of a leap to believe in anything more than moderate growth next year. In fact, economists surveyed by the Federal Reserve Bank of Philadelphia now expect growth of just 2.6 percent next year on average, down from 3 percent in the previous survey three months ago. But there are signs that the economy may be bottoming out.
Weekly jobless claims fell unexpectedly for a second straight week to their lowest level since July. Even though there were unusual seasonal factors including the Veterans Day holiday, the improving results suggest the economy might add jobs in November, reversing a two-month slide.
Manufacturing activity slowed sharply in October, but there are early signs that the factory sector might be stabilizing. Regional reports from Philadelphia and the New York area over the past week, hinting at likely improvement in the closely watched Institute for Supply Management index due out Dec. 2.
Although housing activity fell in the latest month , consumer sentiment has improved, the Index of Leading Economic Indicators was flat rather than negative as it had been for the previous four months.
The economy is hardly out of the woods. While analysts now expect third-quarter gross domestic product to be revised upward from the initially reported 3.1 percent, growth is expected to slow to a near crawl of perhaps less than 1 percent in the current quarter.
“The market today is looking beyond all this to a recovery we can’t quite see,” said Doug Greenig, a bond trader at RBS Greenwich Capital. “A recovery anticipated might just bootstrap itself into a recovery realized. A suspension of disbelief may be all that is required.” |
