Confidence Grows That Stock Market Has Seen the Worst
Bear market, R.I.P.?
Wall Street’s confidence is growing that the brutal stock market decline of the last year has run its course and that the lows reached by key indexes in late March or early April marked the bottom.
Since then, share prices have staged a broad rally that has lifted most major indexes 15% to 32%. The gains continued Tuesday, as the Dow Jones industrials surged 163.37 points, or 1.5%, to 10,898.34, while the Nasdaq composite jumped 52 points, or 2.5%, to 2,168.24.
But the belief that the bear finally has been laid to rest is rooted in more than the mere percentage rebound of the last few weeks. Analysts say evidence has been piling up, both fundamental and technical, to suggest that the deepest market decline since at least 1987 has seen its worst:
* The danger that the economy has slipped into, or is on the verge of, a full-blown recession has dimmed, amid a barrage of data showing surprising strength in consumer spending and at least a stabilization of the manufacturing sector.
The government’s report last Friday that the economy grew at a 2% real rate in the first quarter caught most forecasters by surprise.
If the economy avoids recession now and can pick up steam in the second half of the year, optimism about a turnaround in depressed corporate earnings will grow, analysts say. And the expectation of an earnings upturn has usually been the cue for new bull markets to begin.
Historically, “the turn in earnings [has] generally occurred 10 months after the bottom” in stock prices, said Christine Callies, Merrill Lynch & Co.’s chief U.S. investment strategist.
* The Federal Reserve’s surprise interest rate cut of April 18, its fourth cut this year, suggested to many analysts that the central bank will pull out all stops to keep consumer and business confidence from declining further.
What’s more, many analysts say the rate cut seemed squarely aimed at helping to keep alive the stock rally that began April 5.
Fed policymakers “strongly implied in their statement that they now want stock prices to rise” to reverse the dampening effect that the bear market has had on the economy, said economist Ed Yardeni at Deutsche Bank Securities in New York.
Wall Street trusts that the Fed plans at least one more rate cut, most likely at its May 15 meeting.
Though the Fed arguably is playing a dangerous game if it’s trying to boost the market, analysts note that one rule has been virtually sacrosanct on Wall Street since World War II: “Don’t fight the Fed.” Falling interest rates have almost always been good for stocks.
* The tone of stocks’ rally since most key indexes bottomed in early April has encouraged market technicians--analysts who study chart patterns, trading volume and other market “internals.”
The advance hasn’t been straight up, but rather a pattern of moderate rallies followed by moderate profit-taking. That suggests that buyers are taking their time, and also that sellers have become far less urgent.
To rebuild confidence after a bear market, “you want to see the market move steadily higher, but not with a lot of volatility,” said Tim Hayes, global equity strategist at Ned Davis Research in Nokomis, Fla.
What’s more, the advance has been broad-based, lifting smaller stocks as well as larger stocks, and a large cross-section of industry groups.
“These are the typical signs of an advance” that has some legs to it, Hayes said.
Over the last month, 72 of 87 industry groups within the blue-chip Standard & Poor’s 500 index have seen their shares advance, on average. Within the S&P; mid-cap stock index, 52 of 57 industry groups have risen in the last month.
Skeptics have pointed out that the market’s rally in August also was broad-based, encouraging many analysts to declare that the decline that began the previous spring had run its course. But that rally gave way to another vicious decline in autumn.
Hayes, however, notes that the market backdrop is vastly different today than it was in August. The Fed is easing credit, while investor expectations, share prices and overall stock valuations are far lower than they were then.
Ned Riley, chief investment strategist at State Street Global Advisors in Boston, said an important feature of this rally is that stocks have been able to advance even in the face of more bad news--particularly dismal first-quarter corporate earnings reports.
That, he said, is a powerful sign that “the majority of the negative news has already been discounted in the prices of stocks,” and investors are looking ahead to better times.
“If your time frame is more than a year out, I think it’s a safe bet” to assume that the market either has bottomed or is well into that process, he said.
Even so, many Wall Street veterans aren’t convinced that the market has seen its absolute lows. They point to still-high valuations for many shares, and a questionable long-term profit-growth outlook.
John McGinley, editor of Technical Trends newsletter in Wilton, Conn., argues that many buyers are motivated not by the fundamentals today, but by the simple desire to believe that the bear market is finally over, and that stocks can again be a profitable investment.
“People are hoping here, but that’s not investing,” he said.
The bear market will be over, he said, “When nobody is asking that question” anymore.
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Bear Banished?
Wall Street’s worst bear market since at least 1987 may have run its course, many analysts believe. Here’s how key indexes sank from their 2000 peaks to their lows of late March or early April, and their percentage gains since.
Nasdaq
Bear market loss: -67.5%
Rally from low: 32.3%
*
Wilshire 5,000
Bear market loss: -31.7%
Rally from low: 15.9%
*
S&P; 500
Bear market loss: -27.8%
Rally from low: 14.8%
*
Dow
Bear market loss: -19.9%
Rally from low: 16.1%
Source: Bloomberg News, Times research
