Stock Market Rallies in Face of New Scandals
Even in the face of new scandals on Wall Street, the stock market has managed to keep its six-month rally intact as major indexes have quietly climbed toward milestones.
Stocks notched their sixth winning week in the last seven as the furor over ousted New York Stock Exchange Chairman Richard Grasso’s $139.5-million compensation package came to a head last week and investigative fallout continued to taint the mutual fund industry, whose trading practices are being scrutinized by New York Atty. Gen. Eliot Spitzer and the Securities and Exchange Commission.
At 9,644.82, the Dow Jones industrial average is nearing the widely watched 10,000 mark, and at 1,905.84, the Nasdaq composite index is approaching 2,000, a level it hasn’t eclipsed in 21 months.
Scandal-weary investors apparently have been more heartened by improving forecasts for the U.S. economy and corporate earnings than alarmed by the latest controversies ensnaring Wall Street.
Jim Peoples, a health-care consultant from Agoura Hills, recounted watching a panel of pundits on a financial news channel heatedly discuss Grasso one night last week.
“Man, oh man, those guys were getting all frothy. I thought that was rather amusing,” said Peoples, 59. He said he lamented the “arrogance” shown by Grasso and the NYSE directors who approved the package -- but added: “After awhile it just doesn’t astonish you anymore. The reality is it doesn’t affect me that much.”
Despite a modest bout of profit taking Friday, the Dow has zoomed 28.2% from its pre-Iraq war low March 11. The technology-oriented Nasdaq has rocketed 49.9% from this year’s nadir, though it remains far under its high of 5,048 in March 2000.
The Grasso pay flap and the mutual fund scandal, touched off by Spitzer’s industrywide investigation announced Sept. 3, are mere “background noise” in today’s market, said Kevin Marder, a strategist at Ladenburg Thalmann Asset Management in Los Angeles.
“There is nothing there that would impact the fundamentals driving stock prices, things like interest rates and earnings forecasts,” Marder said.
Indeed, on Wednesday, as the Grasso furor was coming to a head, the Dow eased a mild 21 points -- and the next day it surged 113 points. Stocks also rallied earlier in the month despite news of Spitzer’s probe.
Marder said he saw the market’s broad strength as a signal that third-quarter corporate earnings would come in higher than expected.
The scandals aren’t being taken lightly, of course. The fund probe could mushroom if more major firms, especially leading names such as Fidelity Investments or Vanguard Group, are accused of the trading abuses uncovered by Spitzer. And worsening turmoil at the NYSE -- which the exchange’s board is trying to avert, in part by naming former Citigroup Inc. Chairman John Reed as interim chairman Sunday -- eventually could sap investor confidence, some say.
But the episodes haven’t sparked the same outrage as last year’s revelations of accounting misdeeds at WorldCom Inc. and Enron Corp., which helped push the stock market to five-year lows last October.
“This stock market has been remarkably resilient,” said Phil Dow, a strategist at brokerage RBC Dain Rauscher in Minneapolis.
In part that’s because the Sarbanes-Oxley corporate reforms mandated by Congress are now being implemented, and there is a sense that U.S. corporate governance has improved at least modestly and regulators are on the case.
Another big reason is the economy. “Not a day goes by when you don’t have an economist getting a little more enthusiastic,” Dow said. “Whether they are right or wrong, people are thinking the economy is turning.”
The data are still mixed but on balance getting more bullish, and investors anticipate more traction in 2004, Dow said. One newsletter, the Washington-based Kiplinger Letter, recently predicted that the economy would add more than 1 million jobs in 2004.
In recent decades, September and October have been the stock market’s worst months, according to Stock Trader’s Almanac, and yet the Dow industrial average is up 4.5% month to date. Some strategists, including MTP Review newsletter editor Louis Navellier in Reno have speculated that the market is holding up because Wall Street analysts are not scrambling to lower their profit estimates on the companies they cover, as they often do.
Analysts surveyed by Thomson First Call in Boston expect profits for companies in the Standard & Poor’s 500 index to climb 14.9% in the third quarter over a year earlier, which would make this the sixth straight quarter of profit growth.
The risk, of course, is that lofty projections leave plenty of room for disappointment, so investors might abandon stocks if the targets are not met. Another bearish signal has been the heavy stock selling in recent months by corporate insiders and a lack of buying, strategist Dow said, although that trend is mitigated by the fact that executives have not had a chance to cash in profits for three years because of the bear market.
Still, stock funds have continued to draw investor cash this month. In the two weeks ended Wednesday, a net $3.6 billion came into stock funds, said TrimTabs.com Investment Research in Santa Rosa, Calif.
The alternatives may not be very attractive. Some analysts say the bull market for bonds has passed, and meanwhile, taxable money market fund yields are hovering at an average of 0.52%, said IMoneyNet.com in Westborough, Mass.
“You just can’t keep putting your money in 1% or 2% accounts,” Peoples said, “or keep tying it up in bank CDs.”
Alexander D. Centurioni, 77, an estimator for a kitchen remodeling company in Downey, said he remained optimistic about equities even though his investment club’s portfolio is down 50% from the bull market peak, and even though new Wall Street scandals have emerged.
“I’m disappointed these things are happening,” Centurioni said, “but we always seem to jump back.”
