Trying to Test How False the Positives May Be
MARKET PLACE -- October 28, 1998
By GRETCHEN MORGENSON
NEW YORK -- Is the bear market over? Or is the
recent rise in stock prices just a seductive rally
intended to suck investors in before the market slides
once more?
That's what seasoned investors and traders wondered on
Tuesday as they watched the Dow Jones industrial
average spurt up 101 points in the first hour of
trading, and then lose it all and more by the end of
the day. The average closed Tuesday at 8,366.04, down
66.17 points, or 0.78 percent.
The move was a reversal of fortune for investors who
were beginning to regain confidence that U.S. stocks
could ride out the rest of the world's economic storms.
Indeed, in the last eight weeks or so, the Dow has
risen about 1,000 points, or 13 percent, from its Aug.
31 low of 7,539.07.
Blue-chip stocks were not the only ones to see an early
rally fizzle. The Russell 2000, the
small-capitalization stock index which has risen for
two consecutive weeks, jumped 1.2 percent in the
morning, only to close down 0.57 point. Investors in
bigger Nasdaq stocks, happy to see technology companies
reporting positive earnings, could not sustain their
push either.
So where are we now? At a bull-market rest stop -- or
waltzing into a bear-market trap?
The question may be particularly timely now because
many investors, who are relative newcomers to stocks,
have not yet experienced the trauma of a bear trap.
During the two bear moves before this year's turmoil --
the decline in 1990 that took stocks down 21 percent
and the 1987 crash -- there were no intermittent
bear-market rallies to sucker investors. As a result,
those who have been in stocks for only 10 years or so
may not realize that bear markets can have deceptively
sharp rallies that only serve to lure investors in, and
then take them down.
"The last couple of bear markets we've seen haven't
lasted long enough to test people's psyches," said
Charles White, president of Avatar Associates, a
money-management firm in New York with $3.5 billion in
assets.
And while he noted that the market's breadth has
improved -- the number of stocks going up has risen
considerably from a month ago -- White added, "It still
seems as though we're challenged to break out of some
levels, which indicates that this is nothing more than
a rally in a bear market."
Bear-market rallies are particularly vicious, because
they last just long enough to lull investors back into
a bullish mood. In the 1973-74 bear market, for
example, when stocks fell 45 percent over 22 months,
there were three meaningful rallies that -- erroneously
-- led investors to believe the worst was over. And in
the 36 percent decline that began in December 1968 and
lasted until May 1970, investors were also treated to
three such rallies.
But the biggest "gotcha" of all was in 1930 -- when
stocks recovered from the brutal decline of 1929 that
took the Dow average down almost 48 percent. In early
1930, stocks rose almost 50 percent, and then crashed,
losing 83 percent of their value in the next two years.
As in most downturns, investors today are hoping that
the pain they have been through this year is all they
will have to endure. Sometimes markets do go straight
down and then rebound. In 1962, stocks fell 27.1
percent in six months, and then bounced back into a
four-year bull market that produced compound average
returns of 19 percent annually.
But Alan Kral, a portfolio manager at Trevor, Stewart,
Burton & Jacobsen in New York, is arguing against such
a recovery now. "Nothing that's happened over the past
four weeks has changed the longer-term outlook for the
economy which will drive the market," he said.
"Over the past year we've seen enough of the props of
the economy -- exports and profits -- start to be
chipped away so that growth is now threatened," Kral
said.
The final and most important prop is the consumer, who
accounts for two-thirds of the nation's economic
growth. On Tuesday the Conference Board said that
earlier this month consumer confidence fell to its
lowest level in nearly two years. If consumers pull
back on their purchases, the economy will slow
significantly.
To be sure, investors have had reason to be optimistic.
The biggest lift has come from the Federal Reserve
Board, which has cut rates twice since the end of
September. Lower interest rates are always a positive,
since lower borrowing costs can mean higher corporate
profits.
And concentrated rate cuts are extra-bullish. Market
historians note that in three of four cases when the
Fed has cut rates twice in a row, stocks rise an
average of 19 percent in the ensuing three months.
Since the Fed last cut rates on Oct. 15, stocks are up
almost 5 percent.
More support for stocks has come from a raft of upbeat
earnings announcements. Companies as diverse as IBM,
Estee Lauder, Amgen and Northern Telecom have posted
better-than-expected numbers recently.
But with most third-quarter earnings announcements
completed, the bounce from positive surprises is
probably already built into stock prices. As a result,
Kral believes that the market is at a danger point.
He believes that the nation's employment cost index,
out Thursday morning, will once again focus investors
on rising labor costs and declining corporate profit
margins.
"GDP growth slowing and labor costs going up are not
good from a profit standpoint," he said. "There's a lot
of risk in the market here."
Copyright 1998 The New York Times Company
|
