Quick Market Rebound Seen Unlikely for U.S. Stocks; Investors See Bears
Quick Market Rebound Unlikely (Update2): U.S. Stocks Outlook (Updates with final weekly results in fifth through eighth paragraphs, Disney announcement in 12th paragraph.)
New York, Sept. 11 (Bloomberg) -- The bear market in U.S. stocks is unlikely to end soon, money managers say.
Investors grew accustomed during eight years of gains to quick rebounds every time stocks slipped. Now, after a two-month slide that sent the Dow Jones Industrial Average down as much as 19 percent, few investors are predicting a fast snapback given that economies around the world are slumping and corporate profits are growing at the lowest rate since 1991.
The U.S. market, as measured by the Wilshire 5000 Index, lost $2.4 trillion of its value since peaking at $12.4 trillion on July 17, according to Wilshire Associates Inc. of Santa Monica, California. The Dow industrials' summer slump was the worst since the bear market of 1990 -- and the carnage in small stocks was even greater, with the Russell 2000 Index still down 23 percent below its April 21 record after this week's gains. ''The corrections that we've had have always been with a backdrop of a pretty healthy global economic environment,'' said Trent May, manager of the $820 million Invesco Growth Fund. Now, the backdrop is ''much more worrisome than at any time in the last eight years. I'm not sure it (the market) snaps right back.''
For the week, the Dow industrials gained 2.0 percent, their best week since peaking in mid-July. The Standard & Poor's 500 Index rose 3.6 percent and the Nasdaq Composite Index jumped 4.8 percent. The Russell 2000 rose 1.8 percent.
Stocks started the holiday-shortened week with a surge Tuesday. The Dow industrials soared 380 points after Federal Reserve Chairman Alan Greenspan signaled the possibility of a reduction in interest rates if the U.S. economy slows. Concern that profit growth is slowing sent shares lower Wednesday and Thursday.
The rally resumed today when Independent Counsel Kenneth Starr's report on President Bill Clinton's relationship with Monica Lewinsky was made public and contained no surprises.
Slowing Profits
Still, investors say the relief is likely to be short-lived.
The market crashes and currency devaluations that began in Asia last year slammed into Russia and now are hurting the U.S.'s big trading partners in Latin America and Canada. While the U.S. and European economies remain healthy, the slowdowns elsewhere mean that U.S. companies will sell fewer goods outside their home country, and that they'll compete with lower-priced imports, resulting in lower profits.
Analysts expect the companies that constitute the S&P 500 to post operating earnings growth of 0.7 percent this quarter, which would be the smallest increase since the fourth quarter of 1991, according to First Call Corp., which tracks analyst estimates.
For the year, analysts expect S&P 500 operating profits to rise 4.9 percent, down from 11 percent growth in 1997, First Call said. Fourth-quarter operating earnings are expected to grow 11.4 percent, which ''is still way too high, given what the conditions are out there,'' said Chuck Hill, First Call's research director.
Walt Disney Co. became the latest company to warn that it won't meet lofty forecasts for profit growth. The company said after the market closed today it expects its fiscal fourth- quarter earnings to fall from a year ago because of economic turmoil in Asia and weakness in its film business.
Investors are beginning to realize that even domestic companies will be hurt by the slowdown. Newspaper stocks slid Thursday after a Merrill Lynch & Co. analyst said advertising revenue and profits will be hurt next year because U.S. growth is weakening. Knight-Ridder Inc. fell 4 percent after analyst Lauren Rich Fine cut earnings estimates and her near-term investment rating on the publisher of the Miami Herald.
High Multiple ''You are going to see, over the next 90 days, analysts in industry after industry lower their earnings projections for 1999,'' said Chet Needelman, chief executive of Palley-Needelman Asset Management in Newport Beach, California, which oversees $4.5 billion. Earnings could fall 6 to 8 percent next year, rather than rise, he said.
The S&P 500 is selling for about 20 times estimated operating earnings per share for the coming four quarters, according to First Call. The only time it has been higher in the past 50 years was in the first and second quarters, when it peaked at 23, Hill said.
If earnings estimates are still too high, as Needelman says, either the S&P 500 will fall or its price-to-earnings multiple will increase. Investors are unlikely to pay a higher multiple for companies with slowing earnings growth.
A bear market typically is defined as a 20 percent drop. While the Dow industrials still haven't fallen that much from their high, most stocks have.
Through Thursday, the average stock on the New York Stock Exchange was down 38 percent from its 52-week high, while the average Nasdaq stock was down 49 percent, according to Salomon Smith Barney Inc. ''Just as the bull market went higher, further and longer than people expected, the same thing happens on the downside,'' Needelman said. ''We're still not even through the first phase of a down market, which is denial.''
The firm put some its $4 billion in assets into Amoco Corp. and Philip Morris Cos. in recent days. Those stocks offer relatively high dividend yields, and in the case of Amoco the worst of the plunge in oil prices might be over, Needelman said.
May bought shares of Gillette Co. in the past week at between 41 and 42 a share. The stock fell 2 5/8 to 39 Thursday. ''Sometimes you question if you should buy anything in this market,'' he said. ''There doesn't seem to be any floor under it.''
Still, he'll continue to buy shares of companies that dominate their industries over the long haul, as Gillette does, May said.
Latin America, Clinton
Latin America's credit crunch worsened this week as foreign investors fled in search of safety. Brazil's benchmark stock index lost 16 percent Thursday, and Mexico's dropped 9.8 percent. The region's interest rates have surged as governments try to stem the outflow of capital.
President Bill Clinton's political troubles also intensified this week, and investors said that hurt confidence in the U.S. economy and markets, especially among foreign investors.
Starr's report on Clinton, made public today after a four- year probe, said there was ''substantial and credible information that President Clinton committed acts that may constitute grounds for an impeachment.'' ''We will think about that and what implications it has,'' said Lan Janecek, chief investment officer for stocks at the Florida State Board of Administration, which has $45 billion in equities.
The Florida pension board sold bonds and bought $694 million worth of stocks in the past week, said Janecek, chief investment officer for stocks at the state pension fund, which has $45 billion in equities.
That's not a vote of confidence for the market, though. Stock prices are still higher than justified by the outlook for profits, Janecek said. Florida's equity holdings slid to 58 percent of assets, and the board wants to keep its allocation up around 61 percent, he said.
U.S. Strength
Analysts and investors who say the market doesn't have much farther to fall, such as Goldman Sachs & Co.'s Abby Joseph Cohen, cite the resilience of the domestic economy.
The U.S. is likely to avoid a recession next year, the optimists say. Economic growth is expected to cool to a 2 percent annual pace in coming months, down from 4 percent in the first half of 1998.
Federal Reserve Chairman Alan Greenspan said in a speech last Friday that the economy could slow too much, though he heartened investors by indicating the central bank is prepared to lower interest rates if that happens. Fed policymakers meet Sept. 29 to discuss interest rates.
In the meantime, the yield on the 30-year Treasury bond touched a low of 5.13 percent today, the lowest level since the government began regular sales of the securities in 1977. That means lower borrowing costs and more spending for both businesses and individuals, and thus more spending, which could underpin corporate profits. ''We don't see a significant downside risk'' for the market, said Ronald Stribley, who helps manage $800 million at Anchor Capital Advisors Inc. in Boston. ''The U.S. economy remains reasonably good.'' He recently sold shares of Airtouch Communications Inc. and is about to buy some of the financial stocks that got pounded in the past two weeks.
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