Posted on: Saturday, November 10, 2001

Stock market rally has feel of genuine recovery

By Amy Baldwin
Associated Press

NEW YORK — The stock market's rally this week following the latest interest rate cut was certainly no surprise, given that prices generally rise in anticipation of or following a reduction. Yet, analysts say this upturn is different, because this time investors believe the economy really is about to get better.

In Wall Street's favor, some analysts say, is a certain law of averages. Eventually, they say, the market and the economy will improve.

Generally, it takes six months to a year for the economy to benefit from lower interest rates, making now a ripe time for improvement. The Federal Reserve has cut interest rates 10 times in 2001, beginning in January and most recently on Tuesday by half a percentage point.

"There's a lot of stimulus out there," said Charles Pradilla, chief investment strategist at SG Cowen Securities. "Any corporation that has to raise money can do it much more easily. ... And it is terrific for the housing market."

Optimism that it won't take much to make next year a vast improvement over this one helped the Dow Jones industrials capture triple-digit victories Monday and Tuesday. Such positive sentiment has also helped the stock market to recover from the massive selloff that occurred the first week of trading after the Sept. 11 attacks.

Yesterday marked the first time the Dow closed above its Sept. 10 finish of 9,605.51. In the first week of trading after the attacks, the Dow dropped 1,369 points. The Nasdaq composite index and the Standard & Poor's 500 index regained their pre-attack levels last month.

But Pradilla hesitated to say that a long-term upward trend is in the making.

"We're not in an old-fashioned bull market, but we are much more bullish for the foreseeable future," he said.

Other analysts described Wall Street's mood as cautiously optimistic. While investors hope for a recovery next year, they still see economic weakness.

John Forelli, portfolio manager for the John Hancock Core Value Fund, Forelli noted that such weak data as rising layoffs, and warnings about fourth-quarter sales and profits persist.

"The market is not going straight up from there," he said. "There is too much bad news out there."

Gary Kaltbaum, market technician for Investors' Edge Partners in Orlando, Fla., is even more pessimistic.

"I keep hearing that things are looking OK," he said. "It's the same old talk."

Kaltbaum said he needs evidence that the economy is improving, and until then his firm will continue to keep 80 percent of the money it manages in cash. He pointed out that previous rate cuts inspired weeks of rallying but that the market failed to hang on to those gains once companies began issuing profit warnings.

For example, Kaltbaum said, he wants to see crowds of tourists return to Orlando's Disney World, instead of hearing that business is poor. Disney reported yesterday that its fourth-quarter earnings plunged 68 percent because of a decline in theme park attendance and advertising revenue since the attacks.

Until consumer spending picks up and economic growth returns, it's foolhardy to make major commitments to the stock market.

Forelli recommends that investors be patient.

"If I'm wrong and it is a new bull market — well, bull markets last on average two to five years," Kaltbaum said. "You can afford to be a little late. But if it's not the start, you'll get burned again."

For the week, the Dow climbed 284.46, or 3.1 percent, after advancing 20.48 to 9608.00 yesterday. The Nasdaq gained 82.75, or 4.7 percent, for the week after inching up 0.71 to 1,828.48 yesterday. The S&P 500 finished the week up 33.11, or 3.1 percent, after rising 1.77 to 1,120.31 yesterday.

The Russell 2000 index, the barometer of smaller company stocks, advanced 5.03, or 1.2 percent, for the week, after finishing yesterday down 0.96 at 438.10.

The Wilshire Associates Equity Index — which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues — ended the week at $10.297 trillion, up $280.520 billion from last week. A year ago, the index was $12.688 trillion.