For shot-down investors, hints of ascent

But do recent upticks represent a genuine bull market or a 'bear rally' - a surge within a broader decline?

"The Bulls Will Run Again," promised a headline in the January 2001 issue of Individual Investor magazine. "The technology-driven market is not over yet," read a subhead.

"Investors can reap outsize returns from tech shares" if they turn to companies already clobbered, gushed an analysis in Bloomberg Markets magazine in December 2000.

Alas, the predictions of a better year in 2001 have proved illusory at best, at least up until the past few weeks, as the market has finally begun to rally.

The downturn in technology stocks and lower corporate profits that propelled the stock market into the red in 2000 spilled over into January 2001.

Poof! Whatever expectations of easy gains investors felt in the first few months of 2001 quickly dissipated, as the stock market slump showed few signs of lifting.

Lower or nonexistent corporate earnings kept equities in the doldrums, as investors shifted monies to higher-yielding bonds or, for a while at least, bank CDs and money-market funds.

High levels of inventories, moreover, led companies to slash production - and factory jobs. And mutual-fund managers watched in horror as their performance returns slipped deeper and deeper into red ink.

Few funds bucked the trend in 2001, especially those funds that threw a lot of money at hot-shot companies - such as Enron.

There was little relief for investors, not from federal tax cuts nor from the Federal Reserve.

Despite repeated interest-rate cuts by the Fed, the US economy slipped into recession - a decline that had begun in March, before the terrible events of Sept. 11, but was certainly prolonged by the terrorist attacks.

The investing public watched as unemployment rose, corporate profits sagged, manufacturing fell into the doldrums, and overseas markets drooped.

This year has been "far too exciting," says Standard & Poor's Corp. chief economist David Wyss, with wry understatement. "Looking back, 2001 was a bad year, but not a terrible year."

The year began with the benchmark Dow Jones Industrial Average hovering near the 10800 mark. Since Jan. 1, the Dow has fallen more than 8 percent; the S&P 500 index has dropped 14 percent. But those numbers hardly begin to describe the volatility that wracked financial markets.

Following the Sept. 11 terrorist attack, stock and bond markets proved almost impossible to fathom. The Dow, for example, hit bottom on Sept. 21, at 8235.81.

But guess what? The average has risen steadily since then and is now up over 20 percent from its low. By definition, that means the stock market is now in - hang on to your hats - a bull market!

Analysts now wonder if the recent gains represent a genuine bull market, or, rather, a bear rally. In other words, are we experiencing a short upturn within a longer, downward-trending market?

That's not likely, says Larry Wachtel, a vice president with Prudential Securities Inc., in New York. He points out that the decline of 2001 is actually a two-year decline. The market also fell in 2000, and such back-to-back declines are very rare, says Mr. Wachtel.

The last two-year downturn occurred in 1973-1974. Three-year declines are even rarer, with the last one in 1939-1941. That suggests, says Wachtel, that barring the unexpected, 2002 should be a positive year for equities.

That appears to be the consensus among many financial analysts. Yet those same experts, more often than not, give conditional predictions such as, "2002 should be better," or "the economy is expected to turn around in the second half of the year."

"Corporate profits should begin to turn upward in the spring, which would be the genesis for a better year overall," Wachtel says.

Economic recovery, in part spurred by low interest rates, could actually be under way shortly, during the first half of 2002, argues Walter Frank, chief investment officer with the Moneyletter, a financial newsletter.

Corporate profits next year will be stronger than many Wall Street executives expect, he concludes in a recent report.

Corporate earnings remain the key to 2002, says Terence McLaughlin, chief investment officer for financial firm Ashland Management Inc. in New York.

He believes the market will be up 15 to 20 percent, propelled by gains in pharmaceutical stocks, consumer cyclicals, and even "certain parts of the high-tech industry," such as chip makers. Mr. McLaughlin expects most gains will be under way by the second half of the year.

Looking ahead, McLaughlin believes investors should make certain that they have developed an asset allocation plan that specifically suits their economic needs in 2002 and beyond.

Older investors, for example, might want to have some positions in fixed-income products. Younger investors need to stress growth, which means committing dollars to stocks, especially growth stocks, he says.

But, at the same time, going into 2002, it's important to be a little wary, and have some assets in bank CDs and cash, such as a money-market fund, both as a defensive measure, and also to be able to take advantage of investment opportunities as they present themselves, McLaughlin says.

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