Market looking less like bear
By Danielle Sessa
Bloomberg News Service
NEW YORK — Barry Savitz decided the bear market was over when, after returning from San Diego last month on an overbooked flight, the veteran stock trader found more buy than sell orders from clients.
"I came back and said, 'I am convinced the economy has bottomed,' " said Savitz, 54, a partner at Greenwich Prime Trading LLC, which manages transactions for 40 hedge funds in Greenwich, Conn. "People want to buy stocks. We haven't heard that in a year or two."
Stock-market indexes reached their peaks two years ago this month, driven by a mania for dot-coms and the longest economic expansion in U.S. history. Then the bubble burst. The Nasdaq Composite Index tumbled 63 percent from its 5,048.62 peak. The Standard & Poor's 500 index, with back-to-back years of declines for the first time since 1974, fell 24 percent from its high.
Now some like Savitz are ready to declare the bear market's demise.
The economy is rebounding from recession and the Sept. 11 terrorist attacks, suggesting profit growth will recover faster than expected, they say.
Money managers increasingly say stocks are likely to climb because recent reports on manufacturing, service-industry growth, personal spending and joblessness indicate an economic recovery, helped by the Federal Reserve's unprecedented 11 interest rate cuts last year.
"The benefits of all the cuts in 2001 are going to be felt in 2002," said Christopher Wolfe, who helps oversee $300 billion for J.P. Morgan Securities Inc.'s private-banking unit.
Investors are starting to see results. The Dow Jones Industrial Average has risen 5 percent this year and 28 percent from its September low. The S&P 500, though little changed this year, is up 20 percent from its trough. The Nasdaq, though still down 3.5 percent this year, has gone up 32 percent in six months.
Wall Street analysts expect corporate profits to grow 9 percent next quarter, ending five quarters of falling earnings, the longest decline in three decades. Profits will rise 17.1 percent for the full year, reversing a 17.3 percent drop in 2001, according to Thomson Financial/First Call.
The government reported Friday that the U.S. added jobs in February for the first time in seven months and the unemployment rate unexpectedly fell to 5.5 percent.
"The fact is, the economic data have blown us away," said Wolfe, who recommends clients buy industrial companies that he expects to benefit from a recovery in manufacturing.
Wolfe foresees earnings growth of 15 percent to 20 percent this year even if revenue only increases 2 percent because companies have pared fixed costs by eliminating jobs and closing factories.
Donald Coxe, chairman and chief strategist at Chicago-based Harris Investment Management, which oversees $17 billion, also sees the data pointing to solid recovery.
"Company earnings are going to be stronger than we thought," he said, "because this is a much stronger economy than we thought."
For the first time in three years, Coxe has decided to hold as much money in stocks as in bonds. He bought shares of railroad Norfolk Southern Corp., defense contractors Lockheed Martin Corp. and United Technologies Corp., and oil producers Conoco Inc. and Marathon Oil Corp.
The bear market in the Dow average likely ended Sept. 21, according to Ned Davis Research, an analysis firm based in Venice, Fla., making it the longest decline in 27 years. The Dow's 29.7 percent slide during that stretch is the index's deepest drop since a 36 percent retreat in 1987.
The plunge wiped out $4.5 trillion in market value of U.S. stocks, leaving a trail of failed companies and a pile of debt. In the past two years, 450 companies filed for bankruptcy protection — including a record 257 last year — listing more than $350 billion in assets. More than 750 Web-based companies shut down after the dot-com bubble burst, according to Webmergers.com, a research firm that tracks Internet business.
Revenue has plunged at online brokers that catered to day traders. Charles Schwab Corp., the biggest, posted its first loss in the fourth quarter of last year.
Some insist stocks still haven't fallen enough. Before their decline, stocks rose more in percentage terms than "at any point in history," said money manager David Dreman, 65. "We really had the biggest bubble ever."
To Dreman, stocks are still expensive relative to earnings prospects. "The market is more pricey than in previous downturns and this recovery" will be less robust than those that followed earlier declines, said Dreman, whose $4.4 billion Scudder-Dreman High Return Equity Fund has beaten the S&P 500 the past two years.
Companies in the S&P 500 trade at 23 times next year's earnings estimates, 50 percent above the historical average of 15. In March 2000, the index traded at 26 times the profit forecasts for the next 12 months.
The fact that stocks are still almost as expensive as they were at the height of the bull market leads some to doubt the staying power of the recent rally.
"I don't think the downturn was long enough or painful enough," said Brian Bythrow, who helps manage $800 million at 1st Source Corp. in South Bend, Ind. "Quite possibly, we could be in a mini-bull market inside a longer bear market."
