Wall Street Marches to Revival in the Face of Serious Challenges
Financial markets in the first quarter signaled loud and clear that an economic revival is underway.
That message was heard even above the din of the Enron-Andersen scandal, one of the worst ever to rock investors’ trust in corporate America.
But Wall Street’s performance in the quarter also demonstrated investors’ concerns about how the fruits of the economy’s recovery will be distributed.
The quarter’s big winners included such stock sectors as trucking, hotels and auto parts, all of which posted double-digit gains. Meanwhile, many technology and telecommunications stock groups plunged anew, deepening 2001 losses.
In the bond market, Treasury securities fell out of favor as market interest rates began to rise, reflecting a growing belief that Federal Reserve Chairman Alan Greenspan will be tightening credit by later this year.
But higher-yielding corporate bonds, including “junk” issues, found eager buyers.
In commodities markets, gold was a surprise, rallying above $300 an ounce thanks to a surge of buying by Japanese investors worried about their nation’s banking system, analysts said.
Measured solely by popular indexes, the stock market didn’t have much to show for itself. The blue-chip Standard & Poor’s 500 index inched up 2.81 points, or 0.3%, to 1,147.39 on Thursday but for the quarter was off by a sliver (less than 0.1%, not including dividend income).
Markets are closed today for Good Friday, so Thursday was the last trading day of the first quarter.
The Dow Jones industrials had a better run, gaining 3.8% in the quarter despite slipping 22.97 points to 10,403.94 Thursday.
The tech-laden Nasdaq composite added 18.60 points, or 1%, to 1,845.35 Thursday, but slumped 5.4% in the quarter after losing 21% last year and 39% in 2000.
Apart from technology, however, there were many strong stock groups in the quarter as investors looked for ways to bet on a healthier economy, building on the fourth-quarter recovery that lifted the market from the three-year lows reached in the aftermath of the Sept. 11 terrorist attacks.
Many “old-economy” stocks that were all but forgotten during the technology mania of the late 1990s have new appeal on Wall Street. Case in point: Nickel miner Inco Ltd. rose 15.5% in the quarter, closing Thursday at $19.57. A global recovery is expected to drive up the price of nickel and other basic materials.
Despite the S&P; 500 index’s slight loss in the first quarter, 78 stock industry sectors in the index gained ground while 25 declined. And smaller stocks registered better gains than blue chips: The S&P; small-stock index jumped 6.8%.
The market’s advance lifted even some tech sectors. Semiconductor stocks, for example, rose 14% in the quarter, as measured by the SOX index. Computer chip firms are expected to be among the first tech sectors to benefit from an increase in tech spending.
But many other tech and telecom sectors fell in the quarter, reflecting widespread concern that a meaningful turnaround in tech capital spending won’t occur before year-end at the earliest.
The Nasdaq telecom stock index plummeted 27% in the quarter after diving 49% in 2001.
“There has been no broad upturn yet in business capital equipment orders,” Goldman, Sachs & Co. economists noted in a report Thursday.
Worries about business spending dogged the market overall for much of the quarter, analysts said. Greenspan and others have warned repeatedly that the economic recovery probably will be weak by historical standards because of lackluster business spending.
That, in turn, threatens to limit the expected turnaround in corporate earnings, which last year suffered their worst decline in a generation. With prices of many stocks already at relatively rich levels based on estimated 2002 earnings, a key issue is how much more investors will be willing to pay for shares.
But some market pros warn against underestimating the potential rebound in corporate earnings, especially given the deep cost-cutting many companies have undertaken over the last year.
“If anything, reductions [in corporate earnings growth assumptions] may be too aggressive, thus leaving substantial room for upside surprises,” said Ned Riley, investment strategist at State Street Global Advisors in Boston.
Stocks face other major challenges, however. One is rising long-term interest rates. The yield on the benchmark 10-year Treasury note, at 5.39% on Thursday, is up from 5.05% at year-end.
Though the Fed isn’t expected to begin raising short-term interest rates until later this year--to give the economy a chance to get going--bond investors aren’t waiting: They have pushed yields higher as economic data have pointed to surprising strength so far this year.
Riley and many other analysts note that the stock market usually has continued to rally at the outset of an economic turnaround, even if interest rates are rising. Nonetheless, higher bond yields can be a drag on stocks, Riley concedes.
Rising energy prices also are a threat to a new bull market: Near-term crude oil futures in New York rose 44 cents to $26.31 a barrel Thursday, the highest since September. Prices are up 33% this year as demand has risen while major exporters have limited their output and as traders fear that the situation in the Middle East could threaten oil supplies.
Still, many analysts say the stock market’s resilience, particularly in the face of the crisis of confidence generated by the Enron Corp. and Andersen scandal, is the best indication that the rally can be sustained.
“We ran into a number of pretty serious hurdles [in the quarter], yet the market didn’t collapse,” said Arnold Kaufman, editor of S&P;’s Outlook investment newsletter.
Daily Market Roundup, C5-6
