Despite Fears, Markets Showing Signs of Hope
Wall Street closed out an angst-ridden first quarter with another sell-off Monday, but some of the market trends in the three months suggested investors’ outlook is improving -- despite the fog of war.
Although most stock markets worldwide declined in the quarter, U.S. technology issues were surprisingly strong, hinting that an upturn in business spending may not be far off, some analysts say.
Likewise, “growth” stocks in general performed better than “value” stocks, a shift that also would be expected to anticipate a stronger economy.
Still, the dominant emotion in financial markets during the quarter was fear -- generated first by the anticipation of the Iraq war and, in recent days, by its realities.
Stocks slumped from mid-January to mid-March as investors awaited clearer signs on whether, and when, a conflict would begin. Then, eight days before the United States launched its attack, U.S. shares led a powerful global rally fueled in part by expectations of a short war.
Over the last week, however, the market has surrendered a big chunk of the advance it made just before and right after the fighting started. The Dow Jones industrial average, which fell 153.64 points, or 1.9%, to 7,992.13 on Monday, now has given back 529 of the 997 points it gained from March 12-21.
Year to date the Dow is down 4.2% -- threatening to extend the bear market to four straight years. The market hasn’t fallen for four consecutive calendar years since the Depression period of 1929-32.
But many Wall Street pros argue that U.S. stocks have held up remarkably well so far this year, considering the uncertainties investors have faced. Some optimists point out that the Dow and other major U.S. indexes, at their mid-March lows, stayed above the five-year nadirs reached in mid-October.
“We could have made new lows, but we didn’t,” said Peter Cardillo, chief strategist at investment firm Global Partners Securities in New York.
He views investors’ unwillingness to sell their stocks at sharply lower prices, despite the war and its threat to the economy, as a sign that the market’s next big move is likely to be up, not down.
Tom McManus, strategist at Banc of America Securities in New York, argues that “it makes more sense to anticipate positive surprises instead of negative ones,” given U.S. stocks’ relative resilience in recent months.
Wall Street’s resilience hasn’t rubbed off on most major foreign markets this year. Some so-called emerging markets, such as Russia and China, are in the black. But the German market’s loss is nearly four times the Dow’s drop. The Japanese market is down 7.1%.
The steeper losses overseas raise the question of whether U.S. investors are too optimistic, or whether foreign investors are too pessimistic. In any case, the renewed weakness in the dollar in recent days may indicate that more foreign investors are selling U.S. assets, including stocks. A fresh plunge in the dollar could further rattle Wall Street.
Plenty of U.S. investors remain very cautious. “Every rally of the last three years has failed,” said Dan Sullivan, editor of the Chartist newsletter in Seal Beach. He is waiting for stronger evidence that the market can lift-off, and stay up, he said.
Still, Sullivan said, historically when it has been the most “emotionally difficult” to buy stocks often has been exactly the right time to be buying.
War news may continue to drive the market day to day, but the fundamental issue is what is next for the economy. Market bears say recession remains a big risk.
Recent data point to a weakening in consumer spending, which isn’t surprising given the nation’s preoccupation with the war’s progress, economists say.
The price of oil, which sank with the onset of war, has resurged in recent days on fresh concerns about global supplies. Many analysts had been counting on oil to fall, and stay down, providing a sort of tax cut for businesses and consumers -- in turn, spurring spending and thus corporate earnings.
Rather than concentrate on oil’s day-to-day gyrations, or on the war’s hourly headlines, some market pros are focusing on what they believe to be the message in some key shifts in global markets in the first quarter.
Some of those shifts:
* U.S. technology stocks managed some of the best gains -- or smallest losses -- in the quarter. The Nasdaq composite index, dominated by tech shares, edged up 0.4% in the period. The Nasdaq 100, which includes some of the nation’s biggest tech names, gained 3.5% in the quarter, padding the 18.2% advance of the fourth quarter.
Market bulls see Nasdaq’s revival as a sign that investors are betting on higher capital spending by businesses this year, which could bolster tech companies’ earnings. Some of the strongest tech names in the quarter were in the beaten-down Internet sector. Yahoo Inc. jumped 47% in the period.
* The strength in the tech sector helped make “growth” stocks better performers than “value” stocks in the quarter.
Value-oriented stocks, which typically are those of slower-growing companies, have been investors’ favorites for most of the last three years. The stocks, which usually sell for lower price-to-earnings ratios than growth stocks and offer higher dividend yields, often perform well when investors are more risk averse.
But when investors are ready to bet on a healthier economy, they usually shift to growth stocks. In the first quarter the value stocks in the Standard & Poor’s 500 index fell 6% overall, while the index’s growth stocks were off 1.2%.
* Although many investors sought the perceived safety of U.S. Treasury securities in the quarter, the other end of the bond market -- high-yield corporate junk bonds -- also was enjoying hefty demand.
The yield on an index of 100 junk bonds tracked by KDP Investment Advisors fell to 9.8% by Friday, the lowest since 1999. Bond yields fall as investors bid up the prices of the securities.
Strength in junk bonds also suggests that investors are more confident in an economic rebound than they are worried about a new recession, many experts say.
Still, the market shifts in the quarter weren’t all pointing toward economic optimism. Smaller stocks in general performed worse than blue chips. Smaller shares usually perform better at the start of economic rebounds.
And though the U.S. stock market’s losses overall were muted, more than 70% of stock industry sectors in the S&P; 500 lost ground in the quarter.
