Market’s Gain Spurs Hope -- and Doubt
The fear factor seems to be receding in financial markets, even as the U.S.-Iraq war threat remains high.
But whether the turnabout will have staying power is far from clear.
The U.S. stock market has rallied for two straight weeks, cutting the year-to-date losses in the blue-chip Dow Jones industrial average and the Standard & Poor’s 500 index and lifting the technology-heavy Nasdaq composite into positive territory.
The Nasdaq is up 1% this year while the Dow and the S&P; are down 3.9% and 3.6%, respectively. The Dow ended at 8,018.11 on Friday, up 103.15 points for the day.
Meanwhile, European markets also have rallied modestly for two weeks after five consecutive weeks of losses.
Among other signs that worries have eased somewhat, gold -- a traditional haven in troubled times -- has lost its momentum; at $351.80 an ounce in New York futures trading Friday, it was down 7% from its six-year peak of $379 on Feb. 4.
Also, the dollar’s value has stopped falling against the euro’s in the last two weeks, suggesting that investors worldwide may be less fearful of holding American assets.
Stocks have found their footing despite some uninspiring economic reports and a continuing climb in oil prices that is causing sticker shock at the gas pump. Crude oil futures closed in New York on Friday at $35.58 a barrel, near recent 2 1/2-year highs.
To be sure, the latest rally on Wall Street has lacked punch. Trading volume has generally been light, indicating a lack of conviction among buyers.
But some analysts say the market’s bounce shows that investors are willing to step up in search of bargains whenever key indexes approach the depths that they reached in July and October.
“We’ve tested the lows three times now. What that says is that the market’s lows have taken place,” said Subodh Kumar, strategist at CIBC World Markets in New York.
“But as far as a serious recovery goes, right now it’s still very much a trader’s market,” he said.
Many investors remain wary of making substantial new long-term commitments to stocks with the war threat looming large.
Individual investors who buy stocks via mutual funds appear to be among those unconvinced by the recent rebound. For five straight weeks, domestic equity funds have seen redemptions outweigh new money invested, according to AMG Data Services of Arcata, Calif., which tracks fund cash flows.
Some of the market’s snap-back may be tied to the short-term trading phenomenon known as “short-covering.” In a short-covering rally, investors who sold stocks short -- betting on a decline by selling borrowed shares in hopes of buying them back later at a lower price and pocketing the difference -- scramble to limit their losses by closing out their positions. Their purchases add fuel to a rising market.
Market bulls are hoping that there’s more to the rebound than just short-covering. At the start of the year, optimists expected any conflict with Iraq to be decided quickly in favor of the United States, leading to a surge in share prices and a jump-start for the economy.
The market’s pickup in recent weeks could indicate that that sentiment remains widespread, meaning that many investors are reluctant to sell now and are more tempted to buy.
But even if a war with Iraq is fast and successful, the U.S. economy and market wouldn’t necessarily get the same powerful boosts they got in 1991 after the Gulf War, said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco.
In 1991 the U.S. was in the midst of recovering from a deeper recession, he said, and there was more pent-up consumer demand.
This time around, in part because the housing market has held up so strongly, consumers in 2001 and 2002 didn’t scale back their spending enough to create significant latent demand to drive a postwar boom, he said.
What’s more, the key missing element in the economy over the last two years has been business capital spending, and the outlook there remains worrisome, Schlossberg said.
“It’s critical that business confidence gets shored up, and I just don’t see it with all the uncertainty we’re facing,” he said.
Even if the U.S. is victorious in Iraq, other geopolitical tensions could continue to damp optimism -- for example, the bad blood between the U.S. and France over the war issue, the nuclear face-off with North Korea and the potential for anti-American terrorism worldwide if passions are inflamed by a war, Schlossberg said.
“Companies are not going to open the throttle when it comes to building their inventories and investing in high tech until they can get a better read on the situation,” he said.
And that has downbeat implications for corporate earnings in many industry sectors. Though business profits overall have been rising in recent quarters, analysts note that the gains at many companies have come from unsustainable cost-cutting campaigns rather than from improved sales.
