Good point. Increasing put O/I and a quick-to-spike equity PC has probably supported this thing more than anything.
From the front page of the Washington Post this morning (above the fold, no less):
Investors Decide to Run With the Bulls
With Economy Shaky, Some Analysts Whisper 'Irrational Exuberance'
By Ben White and Amy Joyce
Washington Post Staff Writers
Saturday, June 7, 2003; Page A01
Sitting in front of the White House yesterday, waiting to watch President Bush take off for Camp David, Jim Dawkins, who works for the Air Force, said he was taking advantage of bargain basement prices to get back into technology stocks.
Sure, Dawkins got burned in the market meltdown that began in 2000. But watching the Nasdaq surge again this year, he decided he didn't want to miss the next ride. "I got bit by the tech stocks, just like everyone else," he said. But "it has all evened out."
Many other individual investors apparently agree. Despite the sluggish economy and the fact that stocks remain pricey by historical standards, the market is heating up again, and several indicators, such as cash flow into mutual funds and contributions to retirement-plan stock funds, suggest that small investors are helping drive the advance.
For the year the Dow Jones industrial average is up 8.65 percent. The broader Standard & Poor's 500-stock index is up 12.27 percent. And the Nasdaq composite index, dominated by technology shares, has beaten them both, racing ahead 21.86 percent. This week stocks rose again as the S&P turned in its seventh advance in eight weeks.
Many money managers and Wall Street professionals, citing historical trends and current economic and geopolitical conditions, describe the surge as logical and sustainable. But market skeptics, and there are many, say the current boomlet is nothing short of a return to irrational exuberance. They say investors are piling into stocks not because they represent sound long-term investments but because they are worried about missing the next raging bull.
The culture of widespread stock investing that blossomed in the late 1990s, these people say, did not vanish with the brutal bear market of the past three years.
"People still have a pathological fear of being left behind if the market goes up," said Henry T.C. Hu, a securities and corporate law professor at the University of Texas at Austin and an expert on investor behavior. "The kind of mystical belief in stocks that people had in the late 1990s through early 2000 really hasn't gone away. . . . It's quite distressing to me that people still refuse to let go of this religion."
The price-to-earnings ratio, which compares stock prices to corporate earnings, is still historically high. Stocks in the S&P 500 are trading at more than 20 times earnings for the previous four quarters, compared with a historical average of 16, according to data from Thomson First Call. S&P stocks are also trading at 18 times consensus Wall Street earnings estimates for the next two quarters.
But the skeptics say Wall Street earnings estimates may be far too high, given the unsteady nature of the underlying economy. "In the near term, the market is clearly trading ahead of underlying fundamentals," said Brian Belski, market strategist at U.S. Bancorp Piper Jaffray. "Consensus earnings estimates for the third and fourth quarter are potentially too optimistic and are based on models for ramped up economic growth. . . . There could be a pullback. Everyone is looking for a pullback. Now is not the time to throw caution to the wind."
While it is too soon to say investors are in fact throwing caution to the wind, indicators suggest they are at least warming up to stocks again. Money flowed out of money-market funds and into stock mutual funds for the past three weeks, according to U.S. Bancorp. In the week ended Wednesday, investors pumped $1.54 billion into stock funds. Still, for the year, a net of $1.1 billion has come out of stock funds.
Consulting firm Hewitt Associates reports that workers have slowly but steadily been transferring money out of bonds and into stocks in their 401(k) retirement plans over the past two months, suggesting "mild optimism" about stocks. Money managers also report renewed interest in stocks, particularly health care and technology shares, helping to explain the advance of those two sectors.
Preston Athey, a money manager at T. Rowe Price in Baltimore, said investors were more interested in biotechnology stocks because the Food and Drug Administration appeared committed to speeding up the drug approval process. And he said investors were interested in technology because they expected a stronger economy to lead to increased spending by firms that have gone years without updating their high-tech systems.
Athey, echoed by several other money managers, also said victory in Iraq helped settle nerves and push investors out of low-yielding bonds and into stocks.
"What seemed to hurt the market earlier in the year was uncertainty about the war, which then spilled over into uncertainty about the economy, interest rates and lots of other things." Now that the war is over, Athey said, people have more confidence in the economy and are more willing to take risks. "There is a sense that we've looked into the jaws of the beast and the beast didn't swallow us."
The case made by many stock market bulls also holds that the market historically rises in times leading up to a presidential election, as the incumbent administration does all it can to make sure investors prosper. And there is every indication that the Bush administration is doing just that, particularly with its move to lower the tax rate on dividends paid by companies to shareholders, making equities even more attractive than bonds. In addition, interest rates are low, federal spending is strong and the weak dollar has reduced the prices of U.S. exports.
"This stimulus in the system is massive, and there is enough data to suggest that deterioration in the economy has stopped," said David Kotok, chief investment officer of Cumberland Advisers in Vineland, N.J. "Monetary policy is wide open. Fiscal policy is wide open. We have a weak currency. We have significant tax cuts. Never in history have we had all four of those engines going down the track at the same time with the throttle wide open."
Kotok said that while all the stimulus does not guarantee an extended bull market, it does mean the trend in stocks should be higher for at least the next several months. He also said institutional investors such as mutual and pension funds will continue to pump money into stocks because "they can't report to someone that they missed the market."
In between the bears and the bulls lies the "fairly valued" crowd, those who argue that the market trough that was hit last October reflected irrational pessimism and that stock prices have now rebounded to reasonable levels. Jeremy J. Siegel, a professor at the Wharton business school at the University of Pennsylvania, is among the leading voices in this group. "The market is anticipating an economic rebound and pricing up to that level," Siegel said. "I think if it goes much higher it will be overpriced."
Samuel Hayes of the Harvard Business School essentially concurs, saying there are some indications that the economic recovery "is beginning to get some wheels on it" and that improved corporate earnings should follow.
Hayes also said the decline in bond yields generated by historically low interest rates continues to make stocks attractive. The low bond yields also lead investors to expect somewhat smaller gains in exchange for taking the risk of buying stocks, which are more volatile than bonds.
But while current conditions could lead to modest returns for stocks this year, said Hayes, they cannot sustain the robust advances of the first five months, particularly in the Nasdaq.
"In the short term, the market is reflecting the expectations of investors. People are jumping in in order to get in on the ground floor of what they hope will be a big resurgence in stock prices," Hayes said. "I don't personally expect that because [stock prices] are already fairly robust. We are already, you might say, in a fully priced market, and this current bounce is to my mind an example of an exuberance about the future that is at least partially irrational."
White reported from New York. Joyce reported from Washington. Staff researcher Richard S. Drezen contributed to this report.
© 2003 The Washington Post Company |
