Time to Say Goodbye to Bear Market?


Wall Street’s strong advance of the last seven weeks is convincing more investment pros that the market has seen its worst.

Though risks remain, the resilience of stocks’ rally since Sept. 21 is fostering more talk that the 18-month-long bear market has ended, and that share prices won’t revisit their lows.

That view gets help, in part, from the calendar: The market is entering its strongest period of the year, historically.


With last week’s rally, all three benchmark U.S. stock indexes now are above their levels just before the Sept. 11 terrorist attacks.

The Dow Jones industrial average ended Friday at 9,608.00, 2.5 points above its Sept. 10 close. The Dow has rallied 16.7% since hitting a three-year low Sept. 21.

The blue-chip Standard & Poor’s 500 index has risen 16% since Sept. 21, and the Nasdaq composite has surged 28.5%.

Most money managers don’t expect anything like a return of the roaring bull market that collapsed in the spring of 2000. And some worry that stock prices already factor in a turnaround in corporate earnings in 2002.

Still, many pros say there are several reasons for guarded optimism that the market won’t quickly reverse and fall to fresh lows:

* The plunge in interest rates. With 10 rate cuts so far this year, the Federal Reserve “has made it so that money is basically free” for many borrowers, said Art Bonnel, manager of the Bonnel Growth fund.

“Companies can borrow and make acquisitions, and a couple can refinance their house and use the money they’re saving to buy a sofa or something else for the house,” he said. “That helps the economy, and so does all this wartime spending by the government.”

Meanwhile, extremely low yields on money market mutual funds and other short-term accounts are making many investors more willing to accept the risk that comes with stocks, said Ron Ognar, manager of the Strong Growth fund.

The Fed’s latest interest rate cut, announced Tuesday, is expected to pull the average seven-day annualized yield on money funds below 2%.

* Easing of terrorism fears. Though concern about new attacks isn’t likely to fade soon, “The longer things go on since Sept. 11, the more normal life becomes,” Bonnel said.

Indeed, distance from Sept. 11 could be one reason a University of Michigan survey released Friday showed an unexpected rise in U.S. consumer confidence, Ognar said.

Barring a turn for the worse in the U.S. war effort or a severe new terrorist attack, investors increasingly will focus more on stocks’ long-run appeal than on terrorism-related risk, market bulls are saying.

* Historical trends. If history is any guide, the market has entered its seasonal sweet spot: November through April have been the market’s best six months of the year, on average, according to Stock Trader’s Almanac.

Since 1950, a $10,000 investment in the Dow made on Nov. 1 of each year and cashed out on April 30 of the next year would have generated a total profit of $415,000, the Almanac says.

By contrast, investing $10,000 in the Dow solely from May 1 through October of each year would have produced a total gain of $1,700.

What’s more, November, December and January have been the market’s three strongest months, on average.

* Optimism about an economic recovery in 2002. The U.S. probably is in a bona fide recession right now, many economists say. U.S. wholesale prices plunged in October--a sign of weak demand--and profit warnings last week from household names such as Walt Disney Co. and H.J. Heinz & Co. offered fresh evidence that companies are struggling.

But the stock market typically looks ahead, and that is the biggest reason for the rally since Sept. 21, many analysts say. The stock market is foretelling an economic recovery next year, and with it a turnaround in depressed corporate earnings.

“Every recession has been followed by a recovery, and every bull market has started during--not after--a recession,” Bonnel said.

Companies whose profits have sunk this year will face easy year-over-year earnings comparisons in 2002, said Fritz Reynolds, manager of Reynolds Blue Chip Growth fund.

Even so, as share prices rise, the issue of fair valuation looms larger. Blue-chip stock prices already are high relative to expected 2002 earnings, compared with historical averages.

“Valuations will probably prevent us from seeing a rip-roaring, deluxe bull market,” Bonnel said. “But the real question is how long the expansion can last--and how strong will it be?”

If the recovery is slow, he said, then the valuation question will come into play sooner, and investors will turn more cautious.

Many stocks that have crashed also are at risk of “overhead resistance” as they rally further, Ognar said: Investors who bought at higher prices, and held on, may be increasingly eager to sell as they reach break-even or as their paper losses are trimmed.

Meanwhile, year-end tax-related selling by small investors is another potential depressant in the near term, Reynolds said. Investors who have realized capital gains this year may decide to cash out of stocks on which they have losses, to offset their gains.

Still, Reynolds is among those who believe there is far less risk in the market now than earlier in the year.

“If we didn’t just see the bottom, then I think we’re within a few months of it,” he said. “If you buy now, the worst may be that you’re a little early and you lose 10% or so. That’s no fun, but you’ll probably have the nerve to hang on for the long haul.”