Market Watch : Emotion, Facts Coincide
Let’s assume Friday’s big stock and bond rallies were an overreaction and that things quickly calm down. Does that mean there’s no message in the buying surge?
Any time the Dow Jones industrial average jumps 63.07 in a day (to 2,801.58 on Friday), it’s significant--even if emotion plays a big part. Likewise, the plunge in 30-year Treasury bond yields to 8.66% by last Friday from 8.97% May 4 tells us something important.
And maybe the message--at least the long-term message--is far better than skittish Wall Street is willing to admit now.
Consider what’s happened since Jan. 1. In January, stocks suddenly plunged as interest rates soared, with foreign rates leading the surge. Since then, investors have been trying desperately to figure out what’s next. Another jump in rates from a too-strong economy? A credit crunch, leading to recession? The return of inflation, ruining financial investments altogether?
Friday, the markets looked everything over--including surprisingly low April inflation and retail sales numbers--and decided that the world probably wasn’t ending after all. Here’s why:
* Interest rates may not be headed much lower in the short term, but “the Federal Reserve is telling you that it has no intention of tightening” credit, said Andrew Riley, investment strategist at Yamaichi Securities in New York.
Even before credit-crunch worries forced the Fed last week to tell the banks that it’s OK to lend money again, the Fed was signaling a steady course on interest rates via the federal funds rate. That’s the rate that banks charge each other for overnight loans. The Fed can and does influence that rate, either to tighten credit or to ease it. Since January, the fed funds rate has been almost a straight line--right around 8.25%.
So inflation fears that sent other interest rates climbing were ignored by the Fed. And another group of people also seemed to realize that higher rates wouldn’t last: All those individual investors who flocked to buy Treasury notes and bonds last week, locking in yields of 8.7% to 8.8%. “Small investors were ahead of everybody on this,” marvels Ralph Blair, a stock trader at Montgomery Securities in San Francisco.
* Corporate earnings are down overall, but the economy simply won’t cooperate with the bears who want a full-blown recession. Maybe the economy is just too big for weakness in a few areas, such as autos, to cause a national recession. And if we avoid a broad recession, there’s little reason to think that earnings are about to worsen drastically. Also, relatively speaking, many firms are doing better than shareholders could have hoped. Remember when Ford lost billions as car sales slowed? Now, Ford makes just $506 million a quarter instead of $1.6 billion.
Earnings ultimately are what underpins stock prices, and “as long as corporate America is adjusting to a soft (economic) landing, the stock rally will continue,” argues Stefan D. Abrams, chief investment strategist at Kidder, Peabody & Co. in New York.
One big reason corporate earnings are holding up, Abrams notes, is that exports are booming at many U.S. companies, despite the slower U.S. economy. “Where you want to be--growth stocks, oil service stocks and high-tech stocks--all are major players overseas,” he said. Many of those stocks led Friday’s rally.
* Technical market indicators finally appear to be improving. In plain English, that means more stocks are attracting interest from more investors, after 10 months of market deterioration. “The real serious bears . . . are already out of the market,” said David Holt, technical analyst for Wedbush Morgan Securities in Los Angeles. So he nixes the idea that Friday marked a speculative top.
* Overseas events are likely to continue to help U.S. stocks rather than hurt them. The dollar is falling versus the West German mark, which means our exports are becoming cheaper in Germany (East and West). Meanwhile, Japanese investors, shaken by their market’s plunge, are more interested in U.S. stocks, which remain far less expensive than Japanese stocks.
“The question we’re getting more and more from our Japanese investors is, ‘We really want to get invested in the United States, so what should we be buying?’ ” Riley said. “The sense in Japan is that their market has lagged the U.S. market for a year and that that could go on for another two or three years.”
Of course, all of these bits of good news don’t mean stocks are going straight up short-term. In fact, Stan Weinstein, a veteran analyst who writes the Professional Tape Reader newsletter from Hollywood, Fla., argues that the market is in “the most classic rotation period we’ve seen in a long time.” Investors continue to jump from one industry group to another, always looking for something “hot.” That, says Weinstein, “is a sign of a market that’s not totally healthy.”
But the long-term message seems unmistakeable to bulls such as Edward Yardeni, economist at Prudential-Bache Securities. The savings rate is rising as the population ages. Small investors who rushed to buy T-bonds last week are the vanguard of that trend. Couple a high-savings, low-inflation economy with the rising export power of U.S. companies, and “you can’t arrange a more bullish environment long-term,” Yardeni argues.
MOMENTUM STOCKS?
Some of the big-name stocks that hit new 52-week highs in Friday’s rally:
Fri. Fri. Old Stock close chng. high Boeing 78 +2 5/8 75 1/2 Cap Cities/ABC 597 1/2 +22 1/2 578 Coastal Corp. 34 3/4 +1 1/4 33 1/2 Coca-Cola 83 1/4 +3 1/4 81 1/4 Dover Corp. 40 7/8 +1 40 1/4 Eli Lilly 71 3/4 +2 1/8 69 7/8 Lowes Cos. 38 5/8 + 7/8 38 May Dept. Str. 55 + 3/8 54 3/4 Motorola 76 1/4 +1 5/8 74 3/4 Wal-mart 53 1/2 +1 1/2 52 1/8
