Bull market not reality yet
By Josh P. Hamilton
Bloomberg News Service
NEW YORK — The rebound that U.S. stocks have experienced since the three-year low they reached in September may have run its course.
While Merrill Lynch & Co., Salomon Smith Barney Inc. and Goldman, Sachs & Co. raised forecasts for economic growth, the benchmark Standard & Poor's 500 Index had its biggest drop in six weeks last week. That's in large part because the Federal Reserve signaled it will start raising interest rates, driving up borrowing costs for companies and consumers.
Stock investors have anticipated the economic rebound by pushing the Dow Jones industrial average up 27 percent since its Sept. 21 low.
Economically sensitive stocks such as Home Depot Inc. and Network Appliance Inc., a maker of computer data-storage devices, have been among the leading gainers. The S&P 500, which is up 20 percent since September, now trades at about 22 times forecast earnings, compared with its historical average of 15 and its peak of 26 two years ago.
"The stock market doesn't have to go anywhere," said Darcy MacLaren, director of equity research and a money manager at Safeco Asset Management, which manages $30 billion in Seattle. "When we look where the stock market is relative to expected earnings and interest rates, it's fairly valued."
The Dow dropped last week for the first week in six, falling 1.7 percent, led by Minnesota Mining & Manufacturing Co., while the S&P 500 Index lost 1 percent, led by General Electric Co. The Nasdaq Composite Index slipped 0.1 percent.
Underlining concerns that interest rates are headed higher, the yield on 10-year U.S. Treasury notes neared a 10-month high of 5.39 percent.
Still few investors are predicting a bear market.
"Rising rates are not going to choke off the rally, just make it a modest one," said Edgar Peters, chief investment officer of Boston-based PanAgora Asset Management Inc., which oversees about $15 billion.
"People waiting for the Nasdaq to go to 5,000 will probably wait at least 10 years," he said.
