Prospects for Market Rally Still Uncertain
Some relief rally this was.
Wednesday’s mixed results on Wall Street--with the Nasdaq composite sinking 3.7% and other key indexes little changed amid a flight to Treasury bonds--seemed appropriate for this unpredictable election season, but they begged the question:
Now that investors can stop worrying about who the next president will be, can the stock market finally mount its traditional year-end rally?
Without one, this could be the worst calendar-year performance for the Dow industrials and the Standard & Poor’s 500 since 1981, when both indexes declined more than 9%. The Dow is down 6.1% in 2000 and the S&P; is off 7.4%. For the technology-oriented Nasdaq, the situation is bleaker: It is off 30.6%, on pace for its worst rout since 1974, when it fell 35.1%.
The election cloud has been lifted after five weeks of chaos, and bulls can point to other positive signs: Many hard-hit tech stocks, such as Microsoft and Cisco Systems, have shown signs of firming; U.S. stock funds took in a record $20 billion in the first two days of this week, according to data tracker TrimTabs.com, and money market assets are at record levels, meaning there is a lot of cash on the sidelines that could fuel a rally.
But several factors are clearly weighing heavily on this weary market.
“The overriding problem is that the economy is weaker than expected,” said Fritz Reynolds, manager of the Reynolds Blue Chip Growth Fund. “Every day another analyst comes out and lowers estimates for tech stocks. The bottom may be near, but we’re not out of the woods yet.”
Among the factors that appear to be holding back stocks:
* Sharply slowing earnings growth, as evidenced by a spate of negative “pre-announcements.” According to earnings tracker IBES Inc., 240 companies have already issued profit warnings this quarter, versus the historical average for the full fourth quarter of 190--and the so-called confession season has another month to go.
Firms that have ‘fessed up in recent days include Charles Schwab, Compaq Computer and retailer Claire’s Stores. Wednesday’s warning by Schwab was particularly troubling to some, as the leading online brokerage cited drops in market trading activity and client assets.
Still, IBES equity strategist Joseph Kalinowski notes that many companies have issued warnings recently, only to see their stocks rise the next day or dip only modestly. That group includes Intel, Advanced Micro Devices, Eastman Kodak, McDonald’s, DoubleClick and Xilinx.
“That could be a signal of a market bottom,” he said, “a sign that a lot of bad news has already been factored into many of these stock prices.”
Year-over-year earnings growth in the S&P; 500, which had been running above 20% from the third quarter of 1999 through this year’s second quarter, has shrunk rapidly. IBES forecasts 6% profit growth for the S&P; 500 this quarter and, more importantly, “minimal” growth next year, according to Kalinowski--for instance, 2% to 2.5% in the first quarter and 3% to 5% in the second quarter.
* The belief that President-elect George W. Bush’s victory already has been priced into the market, according to some analysts.
Indeed, so-called Bush stocks--those in industries that he supposedly would keep the government’s hands out of--have risen in the last two months as the Texas governor has maintained a razor-thin edge over Al Gore. These stocks include cigarette maker Philip Morris, defense contractor General Dynamics, health insurer Cigna and drug maker Bristol-Myers Squibb.
* Year-end tax-related selling by individuals, coupled with selling by investors looking to profit from the recent Nasdaq bounce.
Although mutual fund managers usually complete their tax-related selling by the end of November because of their fiscal-year schedules, individual investors often do theirs in December, unloading laggards to lock in capital losses that they can then use to offset any gains, while at the same time cleaning up their portfolios.
Meanwhile, before Wednesday’s sell-off, the Nasdaq had risen 16% from its intraday 52-week low on Nov. 30, so investors waiting for a bounce to get a better price upon selling may now be pulling the trigger.
* Waiting for (who else?) Greenspan.
Federal Reserve Chairman Alan Greenspan has signaled that the Fed probably will drop its inflation-fighting bias when it meets Tuesday, but there is uncertainty over whether it will switch to a neutral stance or go further, either adopting an easing bias or actually cutting interest rates immediately.
Yields tumbled Wednesday as Treasury securities rallied after a government report on retail sales boosted expectations for a rate cut as early as next month.
One longer-term bullish scenario for stocks: If the Fed begins to ease rates by early 2001, Kalinowski said, the effects could start being seen in earnings reports by the fourth quarter of next year--when year-over-year comparisons already will be fairly easy.
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Bush’s New Team?
With the election controversy finally behind the nation, speculation has turned to whom George W. Bush will appoint to key positions in his administration. Deep divisions in Congress may hamper Bush, but he will still exert power over the economy and business through his Cabinet and other key officials. Pictured are prominent individuals known or rumored to be headed for important jobs in the Bush administration.
Lawrence Lindsey is a former Federal Reserve governor who was chief economic advisor to candidate Bush and will serve in a similar key capacity in the new administration.
Kenneth Lay is chairman of Enron, a Houston firm from which he just stepped down as chief executive. Lay, a longtime friend and supporter of the Bush family, will be a major influence in the Bush administration, perhaps even serving as Treasury secretary.
Ted Forstmann is a billionaire financier who in recent years has created the Children’s Scholarship Fund school voucher program. The businessman may be headed to an education post.
Walter Shipley is the retired head of Chase Manhattan, the banker who built the former Chemical New York bank into a national powerhouse and merged it with Chase Manhattan to form a global giant. Shipley is mentioned as a possible Treasury secretary.
* Source: Times research
