Closing Market Report

Star-Bulletin news services

Saturday, November 10, 2001

Investors banking
on recovery in 2002

Wall Street is rallying in the hopes
that financial stimulus will
jump-start the economy

By Amy Baldwin
Associated Press

NEW YORK >> The stock market's rally this past 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, say some analysts, 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 2002 a vast improvement over this year helped the Dow Jones industrials capture triple-digit victories on Monday and Tuesday.

Such positive sentiment has also allowed much of the stock market to recover from the massive selloff that occurred the first week of trading after the terrorist attacks.

Yesterday marked the first time the Dow has closed above its Sept. 10 finish of 9,605.51. The Dow dropped 1,369 points in the first week of trading after the attacks.

The Nasdaq composite index and the Standard & Poor's 500 index regained their pre-attack levels last month.

But Pradilla hesitated to say the market will establish a long-term upward trend in the near future.

"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 are hopeful about a recovery next year, they are still faced with signs of economic weakness.

"Investors are ebullient in the short term," said John Forelli, portfolio manager for the John Hancock Core Value Fund.

But Forelli warned the market could be vulnerable in the coming weeks amid persistently weak economic data, such as rising layoffs, and warnings about fourth-quarter sales and profits.

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

Forelli recommends investors have a time frame of six months to a year, and not try to make a quick return.

"You have to be patient as an investor," Forelli said.

On the more bearish side is Gary Kaltbaum, market technician for Investors' Edge Partners in Orlando, Fla., who says it's not a given that the economy will improve early next year.

"I keep hearing that things are looking OK. It's the same old talk. ... So far, nothing has worked," he said.

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, such as those made last spring, 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 Thursday its fourth-quarter earnings plunged 68 percent because of a decline theme park attendance and advertising revenues since the attacks.

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

As Forelli said, patience is in order.

"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.

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