Is the Bull Tired--or Terminal?
The marathon bull market of the 1990s is approaching the new millennium out of breath, low on fuel and facing ever tougher competition.
Through the third quarter ended Thursday, the blue-chip Standard & Poor’s 500-stock index had struggled to a mere 4.4% price gain year to date.
That figure improved with Monday’s market rally. Still, without a powerful fourth-quarter surge, the index’s unprecedented four-year streak of 20%-plus gains looks like it will end there.
For the average investor in domestic stock mutual funds, meanwhile, the reward for staying in the market through the first nine months of this year was on par with the S&P; index’s return--about 5%.
While a gain is certainly better than a loss, some investors might wonder if the risk posed by stocks was worth it. You could have earned 3.6% so far this year in a risk-free money market fund.
For Wall Street, talk that the now 9-year-old bull market may finally be over has a familiar ring, of course. The bull’s demise has been predicted with regularity throughout the decade. But just as the U.S. economy has shocked most people with its resilience in the 1990s, so too has the stock market stunned even some of its most ardent believers with its upward momentum.
Then why should the current market slowdown feel any more final than previous periods in which stocks either tumbled or stagnated?
The market’s woes this year have been tied to higher interest rates, a weaker dollar and year 2000 computer bug fears, among other issues.
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Yet those problems seem nowhere near as dire as those of a year ago, when investors confronted a Russian bond default and currency collapse, the unraveling of a major U.S. investment fund, a relapse of Asia’s financial flu and an economic and political crisis in Brazil.
The S&P; 500 and the Dow Jones industrials tumbled almost 20% in late summer 1998. This time, the declines thus far have been about half as bad.
There are plenty of optimists who see this as a mere hiccup in a continuing bull market. New York money manager David D. Alger believes that when many investors see the strength in third-quarter corporate earnings--a byproduct of the robust economy--stocks will quickly rebound.
He also sees the Dow, now at 10,401, rising to 20,000 by 2004 as the flourishing of the Internet and the efficiencies it produces counteract inflationary pressures from global economic growth.
But other Wall Street veterans say the bull market is running out of many of the things it needs to survive--especially at its current altitude.
“I feel strongly this is a bull market that is very tired and has a long way to go down from here,” said John W. Rogers Jr., head of Ariel Capital Management in Chicago.
Ironically, U.S. stocks’ problems stem in large part from the very global economic recovery that many investors had been hoping for.
What recovery brings, investors are realizing, is competition for stocks.
The greatest competition comes from higher interest rates. The Federal Reserve, which raised short-term rates twice last summer to keep pace with the economy, meets again today.
Most experts think the Fed will leave rates alone today. Still, there is a clear consensus that the central bank isn’t likely to cut them any time soon. Nor is the European Central Bank likely to loosen credit any further.
Thus, stock markets will be deprived of the tail wind from falling rates that they enjoyed last fall.
Peter J. Anderson, chief investment officer of American Express Financial Advisors in Minneapolis, believes interest rates are more likely to go higher than lower through the next year.
That will continue to weigh on stocks, he said. “I thought we would get a zero rate of return on the S&P; for this year, and I still think we may get that,” Anderson said.
Rising competition for U.S. stocks also is coming from recovering Asian stock markets (weakening the dollar) and from higher prices for commodities such as oil and gold.
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Meanwhile, demand for U.S. stocks from two key sources has weakened this year, as mutual fund inflows have declined and takeover activity has slowed.
That loss of “liquidity” for stocks has coincided with what has been a fairly narrow bull market for much of the last year, said economist Edward Yardeni at DB Alex. Brown. In fact, many individual stocks are down far more this year than the S&P; 500’s decline from its peak, analysts note.
But couldn’t that mean that the latest market pullback is close to running its course--a typical “correction” in a bull market, rather than the beginning of a much deeper slide?
Many market technicians--chart watchers who analyze statistics such as trading volume, advancing stocks versus decliners and broad price movements--say the bull market faces a crucial test between now and the end of the year.
The way the market behaves over the next three months will determine whether there is feast or famine for investors at the dawn of the new millennium, some say.
Richard Arms, the Albuquerque-based author of “Trading Without Fear” and creator of a popular technical tool called the Arms index, notes that the current secular bull market--which he dates to 1982--is quite elderly by historical standards.
Arms expects the market to drift down to about 9,500 on the Dow index, or about 9% below its current level.
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That’s when the real test comes, he said. If the Dow continues to fall below 9,500--and particularly if it does so on heavy trading volume--we can declare the long bull market dead and brace ourselves for an extended period in the doldrums.
How long? The last time an ice age descended on Wall Street, it lasted from 1966 to 1982 for blue-chip stocks. Of course, that was a far different period for the economy. But chart watchers believe the cycles on their charts often repeat, even when the background has changed.
Technical analyst Gregory Nie of Everen Securities in Chicago also sees a major market test coming.
When the Dow dropped below 10,500 two weeks ago, it was cracking what technicians call a key “support level.”
In Nie’s view, this bull market’s last chance for survival will come in the next few weeks as it attempts to rebound.
“The next rally carries a heavy technical burden,” he said.
For the rally to be convincing from a technical standpoint, breadth--the number of stocks rising versus the number falling--must improve dramatically, Nie said.
“We’re going to confront this in the fourth quarter,” he said. “It’s important not to prejudge. Reserve judgment, but judge harshly when the time comes.”
Wall Street’s bulls, even while acknowledging that the market may be fatigued, argue that investors would be wiser to pay attention to the underlying fundamentals than simply to charts.
If inflation doesn’t resurge, interest rates may not have to climb dramatically higher, Anderson said. If investors can see a peak for rates in the context of a growing economy, they will return to stocks before long.
Equally sanguine about the market outlook is Christopher Low, an economist with First Tennessee Securities. He believes the market could sink another 5% to 10% before New Year’s Day but that a strong “relief rally” will occur if the Y2K computer problem fails to produce serious snafus.
At that point, the cash that cautious consumers and businesses have accumulated in advance of the date could be poured back into stocks, Low said.
Still, even some optimists agree that the longer the bull market goes on, the closer it must get to the next bear market--a decline that would shave more than 20% off major indexes and/or involve an extended period of weak or negative returns.
Often, bear markets foreshadow economic recessions--though not always.
Are the U.S. stock market’s poor 1999 returns telling us that this bull is breathing its last--or do they amount to nothing more than the pause that refreshes? So far, that question engenders great debate, but no definitive answer.
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Back to Single Digits
The blue-chip Standard & Poor’s 500-stock index has eked out only a modest gain so far this year, after four years of 20%-plus returns. Annual price changes and change through the third quarter (not including dividends):
Through third quarter 1999: 4.4%
Source: Times research
