Pushing the Bad News Aside, Investors Post an Up Quarter
Facing a host of worries in the last six months, many investors stuck with a simple bet: The economy would be OK, and so would plenty of stocks.
It worked. And that probably will be the story for the next six months as well, Wall Street bulls say.
Most major market indexes posted gains in the quarter ended Wednesday and in the first half. Some of the best performers were stocks of companies that ought to fare well if the economy continues to grow at a healthy pace. The diverse list of winners included trucking firms, fertilizer makers, energy companies and Internet-related issues.
Wall Street’s tone remained upbeat Wednesday even as the Federal Reserve raised interest rates for the first time in four years, lifting its benchmark short-term rate from 1% to 1.25%.
The Dow Jones industrial average added 22.05 points, or 0.2%, to 10,435.48. The broader Standard & Poor’s 500 rose 4.64 points, or 0.4%, to 1,140.84, and the technology-heavy Nasdaq composite was up 12.86 points, or 0.6%, to 2,047.79.
For the quarter the three major indexes were modestly higher, a big improvement from their levels of six weeks ago. The Dow rose 0.8% for the three months, the S&P; 500 gained 1.3% and the Nasdaq tacked on 2.7%.
The market has rallied sharply since mid-May, overcoming a barrage of bad news that had pushed many stocks down in late winter and early spring: mounting violence in Iraq, soaring oil prices, inflation jitters and a surge in longer-term interest rates as it became apparent that the Fed would soon begin to tighten credit.
Robert Morris, chief investment officer at money management firm Lord Abbett & Co. in Jersey City, N.J., likened those concerns to “storm clouds that now are dissipating.”
Like many market pros, he doesn’t expect share prices suddenly to rocket, like they did in 2003. But underpinned by the solid economy, he said, “I see the market sort of floating up in the second half.”
Some stocks did more than float in the first half. Shares of trucking company CNF Inc. jumped 23% in the six months to $41.56 on Wednesday. Fertilizer giant IMC Global Inc. surged 35% in the period to $13.40. Yahoo Inc., the Internet portal, rocketed 62% to $36.40.
Investors also continued to hunt for opportunities among smaller stocks. A Standard & Poor’s index of 600 smaller shares ended the quarter at a record high, and is up 9.6% this year. The Russell 2,000 small-stock index rose 6.2% in the half.
By contrast, most broad market indexes posted low-single-digit gains in the six months. The S&P; 500 was up 2.6%. The Dow was among the few index losers, off 0.2%.
The big stock winners in the second quarter and first half generally had one thing in common: They are expected to reap strong sales and earnings gains from an expanding economy.
That focus in stock-picking should continue to work in the second half, said Ed Keon, an investment strategist at Prudential Equity Group in New York.
“We think a more aggressive strategy will be rewarded,” he said. He cites issues such as diesel engine maker Cummins Inc., which is up 28% this year, to $62.50 as of Wednesday.
To some investors, Cummins is a “cyclical name of a bygone era,” Keon said. But the company’s earnings per share are expected to reach $4.69 a share this year, up from $1.28 a share last year, according to analysts surveyed by Zacks Investment Research in Chicago.
Market bulls view rising interest rates as an affirmation that the economy is on solid footing. And they point to what happened to the stock market in the mid-1990s, when the Fed also was tightening credit.
The market suffered a modest hiccup in 1994 as the Fed began to raise rates. By early 1995, when the Fed was done, stocks were off to the races. The Dow jumped 33% in 1995 as corporate earnings boomed.
This time, one of the factors soothing Wall Street is that the Fed has pledged to go slow in boosting rates. The central bank’s key rate is likely to be at 2% by year’s end, “and the market is not too concerned about that,” said Art Hogan, analyst at Jefferies & Co. in Boston.
A big difference today compared with the mid-1990s, however, is that stock prices overall are significantly higher relative to underlying earnings per share, some analysts caution.
That may be holding back some tech shares in particular. Semiconductor stocks, for example, have struggled since January despite robust earnings.
Some Wall Street pros say investors’ hopes for economic growth in the second half may be too heady.
“We’re probably a little less optimistic than others about the economy,” said Ron Kahn, head of equity research at Barclays Global Investors in San Francisco. It would be natural for the expansion to slow from the fast rates of the last year, he said.
Caution about the growth outlook is making him leery of sectors such as energy, Kahn said. That sector rallied in the first half as oil prices jumped, but oil has come down in recent weeks. Near-term crude futures hit a three-month low on Tuesday, though they rebounded $1.39 to $37.05 a barrel on Wednesday in New York.
Some analysts say investors shouldn’t underestimate the risks still facing the market. The situation in Iraq could deteriorate. And if rising inflation pressures in the first half worsen in the second half, worries about interest rates could deepen.
The Fed indicated Wednesday that its planned “measured” pace of rate increases could accelerate if inflation jumped.
Still, market bulls like Lord Abbett’s Morris say the risk-to-reward ratio favors stocks in the second half of 2004. “Are stocks going to work better than bonds or cash? I think it may turn out that way,” he said.
Among Wednesday’s market highlights:
* Treasury bond yields fell in what traders said was a “relief” rally that the Fed’s statement on rates met market expectations. The 10-year T-note dropped to 4.58% from 4.69% on Tuesday. The yield is up from 4.25% at the start of the year.
* Near-term gold futures in New York inched up 10 cents to $392.60 an ounce. The price tumbled in the second quarter from a high of $428.80 on April 1. A stronger dollar has made gold less appealing, analysts said.
* The dollar ended Wednesday at 108.83 yen, up from 104.22 at the end of March.
