Some Call Stock Rally Premature
It is clear from the activity on Wall Street that the nation’s investors are preoccupied with war--possibly too preoccupied.
Because of the initial successes of the allied forces, the first two days of wartime trading produced a near 140-point gain in the Dow Jones industrial average--a key indicator of stock market health.
Although economists and market experts maintain that a quick, decisive victory for the allied forces would improve the U.S. economy by reducing oil prices and giving consumers and companies more spending power, some believe that the stock market reaction was overblown.
After the war is over, the nation will still probably be dogged by fundamental economic problems, such as unemployment and lackluster consumer spending, several experts said. And that could make this wartime stock rally fade just as quickly as it came.
“I think this (rally) is all pure emotion,” said Jack Kyser, chief economist with the Los Angeles Area Chamber of Commerce. “Even if the war miraculously ended in a week, we would eventually have to get back to the reality that there are still some bills to be paid.”
Specifically: Consumer spending has fallen off. Many major industries are in a slump. Unemployment rates are soaring. Inflation is rising. And companies, consumers and the government alike are enacting austerity measures to pay down their debt.
None of that bodes well for economic growth, which, in large part, is based on the financial well-being of consumers and the companies that serve them.
And without growth, the overall stock market is sure to suffer, just as it has in previous recessions, said Geraldine Weiss, publisher of Investment Quality Trends in La Jolla.
Dividend yields during the past three recessions have risen into the 6% to 7% range versus today’s 4% yield, Weiss noted. Yields rise when stock prices fall, so Weiss thinks that the Dow Jones average could bottom out at the 2,000 level before the recession is over--more than 600 points below Friday’s close of 2,646.78.
“For a moment, investors have been distracted from the problems that remain,” added Alan R. Ackerman, executive vice president of Rich & Co. in New York. “But we still have a weak economy, high unemployment, manufacturing contraction and real concern about worldwide liquidity. We are clearly not out of the woods yet.”
Added Rich Ishida, vice president of research at the Bullish Consensus, a market newsletter that tracks investor sentiment: “Nothing has really changed as far as the bigger picture is concerned. The stock market is still very unhealthy, and the economy does not look good.”
Of course, not everyone agrees.
“The recession ended Wednesday night,” said Ralph Bloch, technical analyst at Raymond James & Associates. “This was a double-dip recession, and the second dip had to do with the Mideast situation. That’s over.”
Bloch maintains that without the inflationary pressure from rising oil prices, the Federal Reserve will be free to lower interest rates and bolster the nation’s sluggish economy. And because oil prices had been rising only because of fears that Iraq could damage oil production capabilities in the Mideast, eliminating the Iraqi threat improves the prospects for the overall economy.
Lower oil prices do provide a lift to household incomes and increase consumer purchasing power, said Gary Schlossberg, economist with Wells Fargo Bank in San Francisco. But he doubts that it will be enough to quickly jump-start the economy. Even if the war were to end tomorrow, the end of the recession would still be several months away, he said.
“We could get some lift from the successful conclusion of the war,” he said. “But even if the war were to end quickly, we don’t think that that, by itself, would trigger a strong enough increase in consumer confidence to pull us out of the recession.”
And if the recession is still with us, stock prices may have risen too far and too fast, some maintain.
“Based on our economic forecasts and current market valuations, we think the rally was overdone,” Schlossberg added. “We think the economy is going to be slow in gathering momentum given all the other uncertainties. If we get a series of disappointments, the downside risks in the market are fairly substantial.”
Added Jerry Jordan, senior vice president and chief economist with First Interstate Bancorp: “People have started asking whether this is the time to start buying stocks and bonds. I tell them it is only if they are the type of person who would go to Las Vegas to make their money. The markets are actually more vulnerable than they were” before the fighting started.
