Risk Takers Back on Wall Street but Their Staying Power in Question
The risk takers have returned to Wall Street. How long they’ll stay remains to be seen, but they have already fueled some dramatic rebounds in stock and bond markets worldwide.
The Nasdaq composite stock index jumped 5.5% last week, bringing its year-to-date rebound to 12.1%, as many beaten-down technology stocks have resurged.
Buyers who moved into many tech and telecom stocks at the very end of last year have been rewarded with some hefty capital gains, at least on paper. Fiber-optic components maker JDS Uniphase has rocketed 46% since Dec. 29, for example, to close Friday at $60.81. EBay, the online auction site, is up 52% in the same period, to $50.13.
Not bad returns for a three-week holding period, though given the market volatility of the last year, it may be that speculators would expect no less.
JDS and EBay, and virtually all other tech shares, still are far below their peaks of last year, of course. JDS once fetched $153 a share. EBay was worth $127 at its peak.
But those old highs mean little or nothing to speculators and investors who are playing the shares now. Their only concern is how much more juice is in the current rally--a question that instantly begs other questions, including: How many more interest-rate cuts are coming from the Federal Reserve? How much weaker will the U.S. economy get in the near term? Will the U.S. dollar’s value hold up? And will President Bush enjoy a honeymoon with Congress that leads to confidence-building policies for the long run?
For now, confidence appears to be in relatively good supply again on Wall Street. The return of risk takers--who, after all, don’t step up without some confidence about making money--has been evident in market action beyond the U.S. tech and telecom sectors in the new year, after last year’s collapse of many high-risk markets:
* Yields have tumbled in the corporate junk bond market since the start of the year as buyers have become much more aggressive. The average annualized yield on 100 junk issues tracked by KDP Investment Advisors fell to 10.52% Friday. It was 11.75% at the end of 2000.
New junk bond offerings from four companies were snapped up by the market on Friday alone, including $1.25 billion of bonds from wireless phone services company Nextel Communications. Nextel’s cost to borrow: an annual interest rate of about 9.5%.
Individual investors in junk-bond mutual funds have already recouped a big slice of what they lost in last year’s junk market dive. The Invesco High Yield fund, for example, has gained 10.3% so far this year, after posting a negative total return of 12% last year.
* Some of last year’s worst-performing foreign stock markets have bounced back since Jan. 1, obviously taking their cue in part from the U.S. tech sector’s recovery.
The main South Korean stock index has jumped 22.8% this year after tumbling 50.9% in 2000.
In Mexico, the IPC share index is up 10.9% this year after last year’s 20.7% decline.
Speculators also are running again in one of the most speculative markets of them all: Russia. The ASP market index has risen 16% since year’s end, after sliding 35% from Aug. 31 to Dec. 31.
The average emerging-markets stock mutual fund is up 9.9% year to date, after plummeting 30.8% in 2000, according to Morningstar Inc.
* The declining aversion to risk is apparent in the loss of appetite for investments that are supposed to offer sanctuary in times of market turmoil.
Gold bullion has mostly been a joke as an investment in recent years, and it furthered that image last week when the price fell below $264 an ounce at midweek, to a 15-month low.
The week before last, the U.S. Treasury auctioned $6 billion of 10-year inflation-indexed bonds, securities that guarantee that investors’ principal will be protected from whatever inflation might occur over the next decade.
Inflation-indexed bonds have been widely promoted by financial advisors as a great portfolio addition for investors who have been looking to offset risk in stock-heavy portfolios.
But the bidding at the latest auction was the weakest for any inflation-indexed bond sale since the Treasury started selling the bonds in 1997, according to Bridgewater Associates.
On Wall Street, most of the credit for the turnaround in markets is laid at the door of Fed Chairman Alan Greenspan.
The Fed clearly energized the markets’ bulls with the surprise half-point cut in the central bank’s benchmark short-term interest rate on Jan. 3, to 6%. Perhaps more important is that investors are supremely confident that more rate cuts are on the way, and the Fed has done nothing to discourage that view in recent weeks.
“The best reason for expecting a market trough is the accommodative monetary policy,” says Sung Won Sohn, economist at Wells Fargo. Fed rate cuts, after all, have been the classic stock market “buy” signal for as long as anyone cares to remember.
By contrast, fourth-quarter corporate earnings reports, and the forecasts that companies are providing for the first part of 2001, are a mixed bag so far.
Last week saw some surprisingly good reports from tech giants such as IBM and EBay. But the economy’s weakness is hitting home at many companies, from machinery giant Caterpillar to retailer Home Depot to Hush Puppies shoe maker Wolverine World Wide, all of which warned last week that this year is shaping up to be a dismal one for earnings.
Those warnings, and profit taking this year in some of last year’s market leaders (such as drug stocks and utilities), are limiting the broader market’s gains this year, despite the Nasdaq market’s hot streak.
The average New York Stock Exchange stock was up just 0.3% last week and is still down 1.6% year to date.
The blue-chip Standard & Poor’s 500 index rose 1.8% last week, helped by the tech sector’s surge. But year to date the index is up 1.7%, a much more muted performance than what Nasdaq has achieved.
In part, the rallies in the most beaten-down market sectors are a function of the calendar: Tax-related selling at the end of the year, as investors with severe paper losses turned them into real losses for tax purposes, obviously abated once the new year began.
Once the selling pressure eased, bargain hunters’ bids for depressed stocks had more impact in fueling a turnaround.
The calendar is helping in another way: January usually brings a flood of new money into the markets from retirement plans. Looking for a place to go, and emboldened by the Fed’s rate cut, more institutional and individual investors seem to have opted to buy what was most out of favor last year.
That strategy was encouraged by year-end market summaries that noted the disastrous consequences a year ago for investors who chased the big winners of 1999--in particular, Internet stocks.
But even as risk takers swarm again in many tech stocks, junk bonds and foreign markets, some of those buyers, and plenty of investors still on the sidelines, must be thinking about the proverbial dead-cat bounce.
With apologies to feline owners, the dead-cat bounce is Wall Street parlance for the strong rebounds that can occur within extended bear markets. In other words, “Even a dead cat dropped from a roof will bounce--but it doesn’t change the prognosis.”
The Nasdaq composite index, and many individual tech stocks, have had numerous sharp rallies since peaking last spring. But the trend has remained down.
This rally does look far healthier than most of the previous ones, however. It has occurred with vastly improved breadth, meaning many more stocks have been rising each week than falling.
Last week, for example, 2,893 Nasdaq stocks rose for the week while 1,599 declined. On the NYSE, rising stocks outnumbered losers 1,831 to 1,396.
Trading volume also has been very heavy--usually a bullish sign in a rally. But that is partly a function of the low prices of many tech stocks now: Investors making a substantial bet either for a short-term trade or as a long-term investment will get many more shares today than a year ago, for the same money.
Can the tech sector’s momentum feed on itself now? It can, if investors once again choose to ignore the question of valuation with many of the stocks.
Thanks to its bounce so far this year, JDS Uniphase shares are priced at 75 times estimated earnings per share in the current fiscal year. EBay’s stock price-to-earnings ratio is 132 based on 2001 estimated earnings.
The stocks’ buyers last week must either assume that those P/Es don’t constitute significant risk, or they must be planning to stay aboard the 2001 rally train only until it runs out of steam.
*
Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to https://www.latimes.com/petruno.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
End of Credit Crunch?
Corporate junk bond yields have tumbled in recent weeks as at least some investors have lost their fear of a huge number of bond defaults this year. Falling junk yields mean more struggling companies will be able to borrow money, easing concerns about a worsening of the credit crunch that developed in the fourth quarter.
*
Average yield on 100 junk bonds tracked by KDP Investment Advisors, monthly closes and latest
Friday: 10.52%
Source: Bloomberg News
