Monday, August 19, 2002

Market's recovery likely to be bumpy

The Associated Press

        NEW YORK — Thirty years in the stock market have taught Bud Hesler the value of patience. He's watched his investments soar during bull markets, and sink when the bears stopped hibernating.

        “History always repeats itself, so I know it's going to get better. The question is how it gets better,” said Hesler, a 55-year-old chemist in Bristol, Pa. “I always try to stay calm about it. I've got my health, and that's the most important thing.”

        Taking a broad perspective is probably the best route for investors because the market's volatility — as last week's trading illustrated — is bound to continue. The Dow Jones industrials, down more than 206 points one day, soared 260 the next.

        Wall Street's recovery is likely to be long and bumpy, with stocks taking years to return to their bull market levels.

        “This is not going to be a sharp V-shaped recovery off the bottom like we saw we saw following Sept. 11, when we had roughly five trading days of sharp selling, the weekend came, and the market took off like a rabbit,” said Will Braman, chief investment officer at John Hancock Funds. “This is going to take a lot more time.”

        Few predict a return anytime soon to the market's all-time highs of early 2000. Back then, the Nasdaq composite index traded above 5,000, the Dow was in the 11,700 range and the Standard & Poor's 500 index hovered near 1,500.

        The more likely scenario, many analysts say, is a market that inches forward and then gives up at least some of that ground. Progress will be slow and gradual — what some analysts call a sideways market. Although stocks may be able to put together rallies, ultimately the momentum will fizzle and the market will backtrack.

        One reason for the caution is history. Although every era is different, the recoveries from the two bear markets most frequently compared to Wall Street's most recent malaise suggest a turnaround will come in spurts.

        From mid-January 1973 to late 1974, the S&P dropped 48 percent while the Dow declined 45.1 percent. By late 1974 the worst was over, and stocks began moving higher, but slowly. It would be the early 1980s before the S&P and Dow closed above their pre-bear market levels.

        The 1987 crash was more dramatic — climaxing with a one-day drop of 508 points, or nearly 23 percent, in the Dow on Oct. 19 — but stabilized within a few months. The S&P, meanwhile, fell 34 percent. By the end of the year, the bear market was over, but it was 1989 before the S&P and Dow regained their former levels.

        Of course, there were unique circumstances in each case — high energy prices and inflation in the late 1970s, savings and loan and insider trading scandals in the late 1980s — that affected the pace of recovery. But they still illustrate the point that healing is not easy.

        For this market, the issue remains wringing out the excesses created by the dot-com boom, questionable accounting practices and what Federal Reserve Chairman Alan Greenspan termed “irrational exuberance.”

        Market observers say spending, both at the corporate and consumer level, is another concern, although for different reasons.

        Corporations that cut costs to minimize losses have yet to resume buying equipment and making other big capital investments — purchases that all help drive profits and growth in manufacturing, technology and other sectors. Consumer spending has held up relatively well, but with the market still prone to selloffs and economic data weakening, there is some concern it too could fade.

        “Unless there's a recovery in capital spending, it's hard to make the case for a recovery,” said Hugh Johnson, chief investment officer at First Albany Corp. “In the case of consumer spending, consumers are very overextended and debt levels are high, which makes them vulnerable.”

        There are also fears that the economy is going to fall back into recession in what's known as a double dip.

        Corporate earnings in the second-quarter improved by less than 1 percent at the companies in the Standard & Poor's 500 index, and analysts say the number of negative forecasts for the third quarter are outpacing positive ones.

        “Third-quarter estimates are in kind of a freefall right now,” said Chuck Hill, director of research for Thomson First Call.

        As a result, most market observers think modest expectations are best.

        “I personally think we're going to be in this range that we're in right now for the next couple of years,” said Jeff Hirsch, publisher of the Stock Trader's Almanac. “Maybe we'll go up to almost 11,000 on the Dow, 1,200 on the S&P and 1,900 on the Nasdaq like we did earlier this year, but that's it.”

        Still, Hirsch sees at least one potential catalyst ahead — even if any resulting gains are short-lived.

        “Most wars, recessions and bear markets occur in the first two years of a president's term, whereas you have most bull market in the second two years,” he said. “That's because the incumbent's party tends to want to make the economy and stock market as positive and rosy as possible before an election, so a lot of legislation and other measure are approved to help.”

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