U.S. Stock Outlook: Computers, Retailers Seen as Bear Market's New Targets
Computers, Retailers are Bear's Target: U.S. Stock Outlook
New York, Sept. 4 (Bloomberg) -- The bear market that devastated U.S. stocks the past six weeks, knocking some shares down almost 50 percent, is now ready to rip through the industries that withstood the slump: retailers and computer- related shares. ''We've gone down harder than I would have anticipated in the initial stages of a bear market,'' said Robert Rodriguez, who manages $1.8 billion for First Pacific Advisors Inc. in Los Angeles. ''It almost doesn't matter what you own.''
The Standard & Poor's 500 Index fell 18 percent since reaching a high July 17, and dropped in six of the past seven weeks. Financial companies were damaged the most, with Travelers Group Inc., a member of the Dow Jones Industrial Average, tumbling 46 percent, and Citicorp, the second-largest U.S. bank, losing 49 percent.
Cisco Systems Inc., Microsoft Corp. and Wal-Mart Stores Inc., among this year's best performers, are the ''next to go,'' said Martin Sass, president of M.D. Sass Investor Services Inc., which manages $13 billion. ''They're great companies, and they deserve to have been good performers.'' Still, their price-to- earnings multiples are ''way up there in nosebleed territory'' given that earnings growth is slowing, he said.
Cisco shares trade at 41 times estimates for next year's per- share earnings, about double the multiple for the S&P 500. Miscrosoft trades at 45 times earnings, while Wal-Mart, the biggest U.S. retailer, is priced at 31 times next year's earnings forecasts.
Optimists say the worst may be over. Interest rates are low and the economy is growing. Typically, the opposite is true before stocks enter a bear market.
Thomas Galvin of Donaldson, Lufkin & Jenrette Securities Corp. this week reiterated his forecast for a 40 percent rally in the market over the next 12 to 18 months. That would take the Dow Jones industrials up 3056 points to 10,696. ''We remain confident that the U.S. economy will continue to be vibrant,'' Galvin said in a report to clients.
Panic Selling
Investors drove the Dow Jones average down 411 points, or 5 percent, this week.
Thousands of stocks hit 52-week lows, including Continental Airlines Inc., Merrill Lynch & Co., auto parts maker Lear Corp. and Illinois Tool Works Inc., which makes construction fasteners. Lehman Brothers now is down 55 percent from its high and sells for its book value -- assets minus liabilities.
The average New York Stock Exchange issue has fallen 38 percent from its 52-week high, while the average Nasdaq stock is down 48 percent, said Jeffrey Warantz, an equity strategist at Salomon Smith Barney Inc. Those declines are bigger than during the past two bear markets, in 1987 and 1990.
While big stocks were damaged during six weeks, smaller shares have been suffering for months. The Russell 2000 Index of small stocks down 21 percent for the year.
On the Big Board, 4.69 billion shares changed hands this week, the busiest ever. ''We had true panic selling,'' Sass said. ''It will just take some time for things to settle down.''
Investor sentiment is so skittish that stocks may fall another 10 percent to 15 percent, even though the S&P 500 is fairly valued given the outlook for earnings and interest rates, Sass said.
A decline of that size would leave the Dow industrials at about 6870.
Worst Over?
While the tumult left the Dow Jones average down 3.4 percent for the year, and the S&P 500 up 0.4 percent, many stocks still have big gains for the year. Lucent Technologies Inc. rose 88 percent. Wal-Mart is up 48 percent. Cisco rose 60 percent and Microsoft advanced 50 percent.
Still, ''money is coming out of those stocks,'' Warantz said. The question is whether slumping economies around the world will cut U.S. consumer and business confidence enough to erase these gains.
Some Wall Street analysts remained upbeat, even after Monday's 512 point plunge in the Dow average. They asserting the decline in stocks had gone too far given low interest rates and the outlook for growing corporate profits. Goldman, Sachs & Co.'s Abby Joseph Cohen recommended investors use the decline to boost their equity holdings.
Investors will get more clues about earnings in the next few weeks as companies issue profit warnings that weigh slowing economies and financial turmoil in Asia, Russia and Latin America.
Analysts expect operating earnings for the S&P 500 companies to rise 2.1 percent in the quarter. At July 1, that forecast was 10 percent.
The bears this week included Merrill and Salomon Smith Barney. They urged investors to lighten up on stocks. Salomon cut its forecast for profit growth for the S&P 500 this year and in 1999.
Technical View
Some analysts who study price and statistical patterns that are supposed to predict stock movements say there are signs the decline isn't over. ''Monday did not look like a bottom,'' said Louise Yamada, a technical analyst for Salomon Smith Barney.
Yamada said declining stocks outpaced advancers by a 2 to 1 margin on the New York Stock Exchange over the last 10 days and losers led gainers in 28 of the past 36 trading sessions.
The decline from the July 17 high is statistically reminiscent of crashes in 1937, 1962 and 1929, said Charles Reinhard, senior market strategist at ABN Amro Inc. in New York.
If history follows, ''any bounce that you see next week will be short-lived,'' he said. The market is likely to hit new lows in the next two weeks, he said.
Investors such as Rodriguez, meanwhile, are watching the world economy to see how bad things might get in the U.S. He has 31 percent of his FPA Capital Fund in cash and bonds. The fund has outperformed the S&P 500 the last 10 years. ''A classic bear market, which I believe we are in, is likely to last anywhere from one to two years,'' said Rodriguez. ''This is going to take a lot longer than a lot of people are anticipating, and people are going to have to go through more pain.'' |
