Dichotomy in Markets Gives Analysts Hope
The stock market on Friday finished its fourth winning week in the last five, while yields on key Treasury bonds kept falling.
Though the markets may appear to be out of sync--stocks flashing hopeful signals about the economy, bonds fearful ones--some analysts believe both markets are in fact pointing to a recovery in the new year.
The Dow Jones industrial average rose 82.27 points, or just under 1%, to 9,545.17, its highest level since Sept. 10. The Dow was up 3.7% for the week and is up 16% from its low in the first week of trading after the terrorist attacks on the World Trade Center and the Pentagon.
The Nasdaq composite closed Friday with a 6.51-point loss, at 1,768.96, but still finished the week with a gain of nearly 6%. The Nasdaq is up 24% from its post-attacks low.
“I don’t know if it’s four months from now or eight months, but sure as little puppies, the economy’s going to be doing a lot better next year,” said Alfred Goldman, chief market strategist at brokerage A.G. Edwards in St. Louis.
The stock market, he said, is doing its traditional job of anticipating a recovery, even in the face of current dismal corporate earnings reports.
But with yields still falling on Treasury securities--the yield on the two-year T-note sank to a historical low of 2.62% on Friday from 2.65% Thursday--the bond market appears to be signaling more economic weakness ahead.
“The bond market has seen some really dreadful economic data, and they’re more sure than ever that the Fed is going to push [its key interest rate target] to 2%” to fight further weakness, said Dana Johnson, chief of research at Banc One Capital Markets in Chicago.
The Federal Reserve’s 10-month credit-easing campaign has seen it slash rates nine times since Jan. 3, bringing its key short-term rate target to 2.5% from 6.5%.
But bonds and stocks aren’t necessarily telling different stories, Johnson said. The “yield curve”--the arc described by plotting the yields of Treasury securities, from shorter-term to longer-term--has become steeper in recent months.
That often happens in advance of an economic recovery, he said, as investors bet that a rebound will boost demand for long-term money and, possibly, boost inflation. Thus, investors are reluctant to let long-term yields decline too far.
The gap between the yields on the two-year and 10-year T-notes, for example, has ballooned to 1.9 percentage points from about 1.1 points in May.
In times of geopolitical turmoil, there is a tendency for investors to pour into super-safe investments such as Treasury securities. But returns on short-term Treasuries now are so low that many investors are switching into stocks, said Scott Bleier, chief investment strategist at Prime Charter in New York.
“Short of Armageddon, [corporate] earnings will have bottomed in the third and fourth quarters,” paving the way for improved stock-market performance, Bleier said.
Still, beyond the enthusiasm in some quarters of Wall Street, there has been little positive economic news. New-home sales fell 1.4% in September to an annual rate of 864,000 , the lowest in a year, the U.S. Commerce Department said Friday.
The University of Michigan’s consumer-sentiment survey, also released Friday, showed that consumers were slightly more upbeat than expected this month, but the index still hovered near an eight-year low.
Tom Van Leuven, an equity strategist at J.P. Morgan Securities, is more doubtful than some about the stock market’s prospects. The lack of any clear signals of an economic recovery could make the market vulnerable to a pullback, he said.
If low interest rates are pushing investors from cash into stocks, Van Leuven said, it is odd that such sectors as semiconductors, software and networking equipment are leading the charge, given that such firms pay very low dividends or none at all. Sectors with higher dividends, which might be expected to attract bond investors, are lagging, Van Leuven said.
He concluded that investors may have jumped the gun on returning to equities. “At some point, it becomes the right thing to do,” he said. “We’re just not convinced that now is the time.”
Defense-industry stocks were among the biggest gainers, pushed in part by a strong earnings report from Lockheed Martin Corp., the nation’s largest defense contractor. Lockheed Martin shares jumped $1.02 to $49.92 in New York Stock Exchange trading.
After the close of the market, the Pentagon announced that, as expected, it had chosen Lockheed Martin over rival Boeing Co. for the contract to develop the Joint Strike Fighter, the most expensive military program ever.
Still, analysts like the whole industry’s prospects well enough that defense-related issues were four of the Dow’s top 10 gainers Friday: United Technologies Corp., up $2.54 to $57.01; Boeing, up $1.78 to $37.68; General Electric Co., up $1.01 to $38.88; and Honeywell International Inc., up $1 to $30, all in NYSE trading.
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Market Roundup: C4, C5
