Wall Street’s Bulls Rampage Again

Bear market 2000, R.I.P.?

Friday’s emphatic stock market rally that carried the Nasdaq composite index to the best week in its 29-year history had investors partying like it was 1999.

Fearing they would miss an opportunity to buy at what might be the market low, investors shed the defensive plays they had cozied up to in recent weeks and piled into technology stocks.

Suddenly, the still-high stock valuations that have made many investors reluctant to buy growth stocks for the last two months seemed not so troubling, as speculation built that the Federal Reserve is finished raising interest rates, or will be soon.

“This has been the norm, to go from depression at the lows to exuberance at the highs in a very short time,” said Larry Rice, chief investment officer at Josephthal & Co. in New York.

Indeed, many Wall Street analysts say stocks could rally further in the next few weeks as long as economic data keep pointing to slowing growth.

“It’ll be a good summer trading rally,” said Christine Callies, chief strategist at Credit Suisse First Boston Corp. “Valuations still [are a cause for concern] in a rising-rate environment. [But] if the Fed is just going to tighten one more time, then valuations could be seen in a more favorable light.”

There is recent precedent for the market rallying before the Fed is done raising rates. In 1994, Nasdaq bottomed in mid-December even though the Fed’s final rate hike wasn’t until Feb. 1, 1995.

Of course, back then, stock price-to-earnings ratios--especially on tech shares--were a pittance compared with their levels today.

In terms of bear markets--if Nasdaq’s downturn really is over--this week’s rally would mark the end of the second-worst rout in Nasdaq history.

At its May 23 low, Nasdaq was 37.3% below its March 10 peak. In duration, the decline lasted 10 weeks and two days. By far the longest and most severe drop was the bear market of 1973-74, which dragged on for almost 21 months as Nasdaq slid nearly 60%.

However, some Wall Streeters are worried that overeager investors could be courting trouble by diving back into stocks.

Though the economy may be downshifting, the Fed still could keep its foot on the brake for a while longer, they say. Rather than a continuous stream of news showing a sluggish economy, naysayers think the data is likely to be mixed, sparking buying when the economy looks to be decelerating but triggering potentially vicious selling when the economy looks hot.

And what happens when the market finally becomes convinced that the economy is moderating? If growth slows too much, the specter of disappointing corporate profits, or even recession, creeps into play.

“A decelerating economy is probably not good for earnings, but right now the market is not focusing on that,” said Byron Wien, equity strategist at Morgan Stanley Dean Witter.

Already, so-called cyclical stocks whose fortunes are tied to the health of the economy have in the last six weeks backed off the gains they posted in late March and early May.

A deteriorating economic picture could weigh hard on smaller companies, particularly “dot-coms” that are floundering for cash. Money-losing firms that had no problem raising funds a year ago lately have found it all but impossible to tap the equity and bond markets. And even venture capital firms are backing away from their least promising progeny.

“How can a dot-com that’s already on its back recover if the economy slows on them?” said Jim Paulsen, chief investment officer of Wells Capital Management.

Ironically, the markets’ biggest nemesis at the moment may be rising stock prices themselves.

Fed chief Alan Greenspan has long fretted that investors spend too freely because their ballooning portfolios make them feel wealthier. Though Greenspan has repeatedly denied that he is specifically targeting the stock market, many on Wall Street believe he remains consumed by it and will keep raising rates if stocks rocket again.

Despite the market’s travails of the last 11 weeks, consumer confidence remains high, jumping in May to near the peak it set in January.

“The economy really hasn’t slowed down that much, and if the stock market is rallying on the idea that the Fed has been successful, that might just trigger another wealth effect,” Callies said. “That would create more consumption, which means the Fed isn’t done” raising rates.

Nevertheless, investors shrugged off those worries Friday.

Blue-chip and large tech stocks could be in for a solid rally, at least until the market focuses on the danger of a slowing economy denting profits, some experts say.

“Between the time that we worry about overheating growth and the time we worry about recession is a wonderful environment for stocks,” said Paulsen, who expects the market to move higher in the next month. “People think that we’re going to grow but do so without inflation and with falling [bond] yields.”

“At this point earnings still look terrific,” said Joe Cooper, research analyst at Boston-based data firm First Call Corp., which tracks corporate profits. “It’s kind of caught us by surprise how solid things look.”

He said signs of a profit slowdown could show up in early 2001, as the rate hikes work their way through the system, but, at least for now, most analysts remain sanguine about companies’ prospects.

For the second quarter, First Call expects year-over-year earnings growth of 18.2%, on average, for companies in the blue chip Standard & Poor’s 500. That’s less than the first quarter’s near-record 23.5% growth, but far above the historic norm of 7%.

Many individual investors Friday were anticipating a return to good times.

“I can’t wait till Monday when [institutional investors] start buying and mom and pop send in their mutual fund money. Like I keep saying, who wants to be left at the gate?” wrote one investor on the RagingBull.com Internet chat site.

Still, the sudden euphoria smacks of trouble to some experts.

“There’s too much confidence that has come back into this thing too quickly,” Rice said. “It’s disconcerting how fast they’ve come back into the biggest stocks with valuations that are just wild.”

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JOBLESS RATE

U.S. unemployment rose, possibly signaling a slower-paced economy. A1

* HOME SALES

For-sale signs are popping up, but buyers seem to be hanging back. A1