Investors Wary of September
It’s been a cruel summer on Wall Street. After swooning to five-year lows in late July, stock prices rebounded strongly only to falter as the U.S. economy showed signs of weakening.
In a fitting coda, the Dow Jones industrial average blew a 112-point gain Friday to end the day and the month with a loss. That gave the widely watched index a five-month losing streak for the first time since the summer of 1981.
Now, as September dawns, investors are bracing for a variety of challenges--not least among them history. Over the last half a century, September has been the worst month by far for the stock market. Some market watchers hope this year will be different, in part because the pre-Labor Day selling has been so fierce.
“They say, ‘Sell in May and go away until late September,’ ” said A.C. Moore, chief investment strategist for Dunvegan Associates in Santa Barbara. “But I think because stocks were very weak in July, there could be better action in September.”
But more than the past is haunting Wall Street. There’s the threat of war with Iraq, which would destabilize the Middle East, send shock waves through global oil markets and rattle investors worldwide.
Also, next Wednesday is the first anniversary of the Sept. 11 terrorist attacks, which occurred only blocks from Wall Street and forced the longest stock market shutdown since the Great Depression. Concerns about some sort of terror strike could weigh on investors, analysts say.
And then there’s the wave of financial scandals engulfing corporate America. Recent revelations, although dramatic, have involved companies and executives already known to be in trouble and have had little effect on the market. But a new scandal involving an unsuspected miscreant could push investors over the edge--and out of stocks.
Most important, though, will be the behavior of the U.S. economy and the developing outlook for corporate profits for the rest of the year and into 2003.
“The market is nervous about earnings for the remainder of this year and, more importantly, next year,” said Mike Kayes, chief investment officer at Eastover Capital Management. “That’s the key: Will we see an earnings acceleration? If not, the market is not going anywhere.”
The early trend isn’t promising. Key players such as Sun Microsystems Inc., RadioShack Corp. and Best Buy Co. lowered earnings expectations last month, citing a slower-than-expected rebound in corporate and consumer spending. On Friday, BellSouth issued a fresh profit warning only five weeks after revising its outlook, “highlighting the speed at which business conditions have apparently deteriorated,” Merrill Lynch analyst Adam Quinton said.
The outlook is especially bleak among tech and telecom stocks. In addition to Sun, Intel Corp., Novellus Systems Inc., Nortel Networks Corp. and Hewlett-Packard Co. all have issued sobering news recently about their prospects.
Overall, the number of companies that have cut their third-quarter earnings forecasts is up 30% from the same point last quarter, said Ken Perkins, an analyst at Thomson First Call. And the number raising profit expectations is down 32% from three months ago.
Likewise, analysts now are predicting that third-quarter profits for companies in the Standard & Poor’s 500 index will rise 11.2%, down from the 16.6% increase they were forecasting July 1, according to Thomson First Call. Fourth-quarter earnings are expected to increase 22.9%, down from the previous prediction of 27.7%.
“The natural adjustment from good economy to good profits isn’t happening,” said money manager Kevin Jones of ICM Asset Management Inc. For earnings, “I’d like to see the bar set a little lower.”
As companies struggle to meet Wall Street’s profit forecasts, the economy is sending decidedly mixed signals. Economic growth slowed markedly in the second quarter, employment has been soft and consumer confidence was dealt a heavy blow by the market’s May-July sell-off. The signs of economic weakness helped send the dollar to a loss in August against the yen and euro, its sixth losing month out of the last seven.
But even as sentiment tumbles--and the bear market nears its 2 1/2-year anniversary--retail sales haven’t collapsed and there are scattered signs of a revival in the nation’s factories, including a report Friday that Chicago-area manufacturing activity rose for a seventh month.
Which is why investment pros will be paying close attention this week as the first round of post-Labor Day economic reports are released.
“Just keep your fingers crossed that the reports are consistent with the view that the economy continued to expand in August,” said Hugh Johnson, chief investment officer at First Albany Corp. “That will determine the outcome for the markets for the entire month of September.”
A broader reading on the state of U.S. manufacturing, which makes up one-sixth of the economy, will come today when the Institute for Supply Management releases its monthly manufacturing index. In July the index fell to 50.5, its lowest level since January. Analysts expect the index to reach 51.6 for August, according to a Reuters poll.
On Wednesday, August car sales and truck sales roll in. Economists polled by Reuters are expecting auto makers to report 6.2 million car sales and 7.9 million truck sales.
“Auto sales give you a sense of what consumer spending did,” Johnson said.
Economists watch consumer spending closely because it makes up two-thirds of economic activity. In recent months, consumers have continued to spend freely, with robust July auto sales and new-home sales hitting a record.
August unemployment figures will be released Friday.
“The health of the labor market is a critical input into the whole issue of consumer spending,” said Bruce Simon, chief investment officer of Glenmede Trust Co. “That is one of the key factors in support of the modest rebound we’re experiencing.”
In July, a scant 6,000 new jobs were generated as firms kept a tight rein on hiring. Although the unemployment rate was unchanged in July from the June level of 5.9%, the gain in the number of jobs was far below economists’ expectations. For August, economists expect the unemployment rate to be unchanged and for 37,000 new jobs to be created.
The pace of economic growth also is being closely monitored by bond investors. The yield on the benchmark 10-year Treasury note has declined by more than 1 percentage point since the end of March, as some investors anticipated a faltering economy would keep inflation in check and prompt the Federal Reserve to leave its target interest rate at a 41-year low until next year.
“Treasuries have done pretty well as people pushed back their forecasts for when the economy will grow strongly again,” said Ken Anderson, fixed-income manager at Evergreen Investments. “We won’t see higher rates out of the Fed any time soon.”
Indeed, with interest rates so low that investors may be lured back to the stock market, and with many analysts saying stocks have been beaten down to the point that they are starting to look like bargains, it’s possible that September might defy history this time around.
“I know that September has a bad reputation, but I think the situation this [year] is much more likely to be positive than negative,” said Tim Kochis, financial planner with Kochis & Fitz in San Francisco. “We are still coming off a quite significant revaluation of [stock prices] in July.
“But all bets would be off if there is on Sept. 11 some evil anniversary repetition of what happened last year, or if the rhetoric turned to military activity against Iraq. That would obviously dampen what might otherwise be a very positive month.”
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Times staff writer Kathy M. Kristof contributed to this report, and Reuters and Bloomberg News were used in compiling it.
