Posted on: Sunday, July 4, 2004

Investors waiting for second half surge

By Matt Krantz
USA Today

Sometimes, stock indexes don't tell the full story on Wall Street.

This year is a perfect example. Major indexes make 2004 look like a snoozer. At the end of the second quarter, the Standard & Poor's 500 was up just 2.6 percent and the Nasdaq composite 2.2 percent. The Dow Jones industrials, meanwhile, were down 0.2 percent.

But dig just a bit and investors will see that 2004 has been wild in some surprising places. For instance, despite all the worries that Internet stocks were overvalued after soaring in 2003, they've turned in 2004's best performance, gaining 40 percent or more. Meanwhile, gold stocks, investors' best friend last year, got clobbered, falling 20 percent.

Such radical and violent shifts under the seemingly placid surface prove investors have been bracing for a different economy and stock market. While they've remained invested in stocks, they've shifted money to be ready once short-term interest rates begin to rise.

"Despite the higher rate environment ahead, investors are not willing to bail out of stocks," says Sam Stovall, strategist at Standard & Poor's. "But they've been making tactical decisions on where to invest their dollars."

Those decisions have created some heroes and zeros of the year so far, many coming from surprising places:

• The big winner: Internet software and services. The blistering performance of this group has been even more startling given that technology stocks overall have been the year's worst performers, down 0.5 percent.

Online ads are drawing investors to the industry amid a growing realization that companies still dedicate a relatively small portion of their ad dollars to the Internet, says Darren Chervitz, research chief at Jacob Asset Management.

That's quickly changing as even big companies dabble with online ads. And no place has the shift been seen more than at online portal Yahoo, Chervitz says, pointing to the shares, which have gained 62 percent this year. "Things are going gangbusters," he says.

• The big loser: Gold. Investors have scurried away from the precious metal this year for the same reasons they embraced it last year, just in reverse.

The Federal Reserve is ready to fight inflation head-on this year by raising interest rates, so rising prices are no longer as scary as last year. That takes away the luster of gold, which is typically a favorite of investors looking to protect themselves from inflation. "Gold is an inflation hedge," Stovall says. "If it looks like inflation is under control, who needs the hedge?"

That explains why much of the selling has been coming from hedge funds, trying to bail out early, says Bill Martin, manager of the American Century Global Gold fund. "We've seen speculative selling," he says.

• The big wildcard: Technology. Despite Internet stocks' oversized performance, tech stocks had a tough go of it. Seven of the 15 tech subindustry groups ended the first half lower.

But despite troubles in the first half, investors are still optimistic about the second half and the strong earnings outlook. "We're in for a monster second half," says Jim Oelschlager, chief investment officer at White Oak. "At some point, the market will wake up."

But above all, Kevin Landis, portfolio manager at Firsthand Funds, says, this second quarter investors could feel it's safe to be bullish again.

"It's tough to stay really scared for a long time," he says. "If that anticipation recedes, even a bit, that might set us up nicely for a rally."

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