18 Oct 2002 Is the Bull Back?
Is the rally of the last few days for real – is the market bottom in place – do stocks rise from here – is the Bear dead? Earnings drive stock prices in the long run and those reported so far this quarter suggest substantial improvement. Nokia, for instance, said that they saw earnings stabilize in the second quarter and now believe by third quarter results that the turnaround is for real. IBM reported an earnings increase of over 10% in a very difficult information technology-spending environment. UnitedHealthcare said its earnings rose over 53% on cost-cutting and increased premiums. Numerous others today and the preceding several days have beaten their earnings goals.
The dampeners on stock price increases have come when managers express uncertainty about next year’s earnings. As they express some uncertainty about the unknowable future, one must wonder how much of their reservations are based on the strict SEC scrutiny for truth in public statements and the dramatically increased level of litigation. Some do indeed tell us of their current business levels and project a rate of future growth from it. But the vast majority of managers now seem quite reluctant to share anything but the possible negatives.
After several quarters of declining profits, the lack of decline should be taken as a good sign. A car in reverse must stop before it can proceed forward. Some cars stopped their reverse and started forward a couple of quarters ago (healthcare and consumer non-durables), some are doing so now (comsumer durables and technology service companies), and some continue to be stuck in reverse (semiconductors and tech hardware). The process of recovery likely has begun, but it is in slow motion.
Because our economy is over two-thirds service related, the consumer remains the most important component. A lot of questions have been raised during the last couple of months about just how much continued support could come from consumers. Retail sales have been slowing of late and consumer confidence has dropped in recent months to near 9/11 lows. But, remember what caused the drop. During the month of July we experienced one of the most horrific stock market periods in market history. The sheer voracity of the market’s drop scared people, it scared them a great deal. Our anecdotal evidence of the number of calls we received from clients and the degree of concern in their voices spoke volumes. It is perfectly natural to expect spending to slow during such a period of fear. But is it reasonable to expect people to curtail their spending indefinitely?
The answer lies partly in the causes of the stock market’s decline. Talk of war with Iraq and continued terror threats at home were a major concern for investors. Political criticism of the economy during a congressional election cycle, corporate malfeasance, and continued warning of earnings misses continued to sew seeds of mistrust among investors. But, at this point it is fair to say that the latter issues are improving and will likely continue to do so. It is impossible to know what the outcome of war with Iraq will be for investors. If it happens, our experience ten years ago tells us it will be relatively brief and will have only a short-term effect on the market. To the market’s advantage, investors have had time to prepare for the likelihood of war; ten years ago markets were shocked by Iraq’s incursion into Kuwait.
We will only know the answer to the question posed by today’s title in the months to come. But as you know, it is better to begin investing ahead of a Bull market rather than when everything is rosy. Cautiously optimistic, we believe we are positioned to take advantage of stock market advances as they occur, but remain cautious enough to withstand potential shocks to the market in the near future.
