Finally, a stock rally with vigor
After innumerable brief run-ups, the latest rise on Wall Street has lasted for months. Could this be the real thing?
NEW YORK — Investors are turning optimistic, almost bullish.
The more positive attitude on Wall Street may have important ramifications for the economy. Higher stock prices buttress consumer and business confidence, which has been anything but ebullient during the past three years. And if Wall Street is right, it may signal that the economy will be back on the growth track in perhaps six to nine months.
• The Dow Jones Industrial Average is up 21 percent since March.
• The Nasdaq, a barometer of high-tech stocks, is up 50 percent since last October.
• The total market has added $1.6 trillion in value - equal to 17 percent of the US gross domestic product.
Moreover, the past three weeks have been particularly robust on Wall Street. Indeed, the stock market appears to be "shaking off the blues." It's almost enough to get people to look at their brokerage statements again. "People are feeling noticeably better after the conclusion of the Iraq war," says Fred Dickson, research director at D.A. Davidson & Co., a brokerage firm in Lake Oswego, Ore.
Yet beneath the current optimism lies an enduring question: Is this, finally, the great turnaround or just another false run-up? Certainly there are some lingering concerns. A domestic terrorist attack could knock the economy back on its knees. Other nations' economies remain weak. If they don't pick up in sync with the US, this could retard growth here as imports swell without an increase in US exports.
"Fortunately, the wall of worry is lower than it was three to six months ago," says Mr. Dickson.
Behind some of the better investment climate is a lot of money looking for better returns. Money-market funds are returning 1 percent or less, and, at the end of April, there was $2.7 trillion sitting in these accounts.
"Money is finally seeking the highest rate of return," says Kevin Gaughan, a portfolio manager at Milwaukee-based Strong Funds, which oversees $41 billion.
Wall Street is anticipating even more cash flowing from money markets into stocks after the Federal Reserve meets later this month. With Fed chairman Alan Greenspan talking about the need for an "insurance policy" to prevent a bout of deflation (prices and the economy falling), many analysts are anticipating yet another interest-rate cut.
If the central bank does lower rates again, it would drop the Fed Funds rate - a short-term measure of borrowing - to as low as .75 of a percent. After expenses, some money-market mutual funds will barely have a return.
The Fed chairman would probably like to see some signs that the economy is starting to respond to past cuts. Last Friday, the government reported the nation's unemployment rate in May rose to 6.1 percent, from 6 percent in April, which was the highest level in nine years.
There were 17,000 jobs lost - a considerable improvement over the trend earlier this year when the numbers were in the hundreds of thousands. "The losses are tapering off, but we're still showing that we're not creating jobs," says Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh.
Investors and businesses may have been constrained by all the political unsettledness in the world. "Now that those uncertainties are waning, the prospects for growth are being increasingly recognized," says Richard DeKaser, an economist at National City Corporation in Cleveland.
IN FACT, Gaughan finds many similarities between today and 1962-63, when the nation was faced with the Cuban missile crisis and the beginning of the Vietnam war. On the domestic front, inflation hovered around 1 percent, about where it is today. Mortgage rates were just under 5 percent. Economic growth was moderate, and investors considered the stock market too high.
"Once one of the conflicts was resolved - the Cuban missile crisis - growth stocks spurted by 63 percent the next year," he says.
Like then, growth stocks are starting to move up again now. Biotechnology stocks, for instance, are up 37 percent from last October's lows. "Most of these are concept companies that don't make any money," says Dickson. "It's a real indicator that people are finally moving back into the risk side of the equation."
Still, it's hard to say when profits on Wall Street will trickle down to Main Street. The so-called "wealth effect," where individuals feel so confident about their net worth that they go out and buy new cars and appliances, may take a while to kick in. "Those effects are gradual over an extended period of time," says Mr. DeKaser. "Especially in light of the falling wealth for many years."
In fact, investors have been so badly burned by the stock market, many are loath to put their money in equities again. "It's only in the past several days we're starting to see money from the small investor," says Gaughan.
Some investors may be drawn back into the market because of the tax break on capital gains and dividends. "It's clearly been more bullish for the stock market than I thought," says DeKaser.