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No longer pessimistic,
investors are lying low,
waiting for clues
NEW YORK » The mood has changed on Wall Street. And it's for the better.
For months, investors took any bit of news, good or bad, as a reason to sell. With the market extraordinarily pessimistic, even the good news was parsed and dissected until negative implications were found. And the bad news -- interest rates, inflation and Iraq -- caused triple-digit drops in the Dow Jones industrial average.
Now it seems investors have come to grips with the uncertainty that has plagued the market since March. And for the first time in weeks, good news is having a good effect on stocks.
"The past two months were a weird aberration where everybody was going to the short term," said Bill Groenveld, head trader for vFinance Investments. "Now we're seeing people go back to the traditional long-term thinking. Forget the past two months. Where am I going to be in two years? The economy's finally coming back. Why am I selling now?"
Of course, investors still have yet to flock back to buying. This past week's New York Stock Exchange volume was very low -- Thursday's was the lowest for 2004. That means many investors are waiting for key events to give them some insight, such as the May payroll figures coming out June 4 and the Federal Reserve meeting at the end of the month.
For now, the three major uncertainties that have plagued the market have been tempered, if not resolved.
» Interest rates. Since the Federal Reserve's last statement in May, investors have become increasingly convinced that the Fed will raise benchmark rates by at least a quarter percentage point at its next meeting, June 29-30.
The last Fed statement, issued May 4, caused a great deal of alarm on Wall Street as investors wondered what the central bank meant when it forecast a "measured" pace of interest rate hikes. But as time wore on, investors felt fairly certain that rates would rise in June -- and reminded themselves that rates only rose in a strong economy with sound fundamentals.
"When you have positive fundamentals like this, strong enough for the Fed to act, it's usually an indication of strong recovery, and the market can do OK in that kind of environment," said George Saxon, chief investment officer at Dupont Capital Management. "We're in an adjustment phase now, which is why you've seen some trading sideways. When that process is complete, the positive fundamentals will push the market higher."
» Inflation. So far, while the economic data from the government has been strong, analysts said there's nothing to point to for inflationary concerns. Prices remain relatively stable, and some analysts noted that a slight rise in prices, on the order of 1 to 1.5 percent, would keep the economy from overheating.
Oil prices have been the biggest inflationary concern, but when oil ministers from both Saudi Arabia and Qatar called for an increase in production yesterday, Wall Street responded positively. Since it's not in oil-producing countries' interest to price their oil out of the market, most economists predict prices will fall in the near future.
"Oil isn't the only part of the inflation story, but it's certainly a part," Groenveld said. "It's nice to see those prices coming off their highs, because that puts more money in people's pockets to spend on other things. And those other things will boost bottom lines in the second half of the year."
» Iraq. The deteriorating situation in Iraq has been responsible for a number of market declines, most recently the 105.96-point drop in the Dow on Monday after the assassination of Iraq's governing council president. But by the end of the week, the market recovered and even posted a small gain.
While the markets remain susceptible to major world events, much of the bruising news out of Iraq has been assimilated by the markets.
"The news out of Iraq has been so negative for such a long period of time, I do think investors are beginning to get a little desensitized to the daily reports out of Iraq," said Brian Bush, director of equity research at Stephens Inc.
"I think there's some kind of benign acceptance that this is going to be a long, drawn-out situation. I think people are getting back to focusing on things like earnings and the overall health of the economy."
Feeling better about these major issues has let investors look at the market's fundamentals -- including a very strong first-quarter earnings season and impressive economic growth -- to determine where to place their bets. Interest rate-sensitive stocks, such as financial companies, have improved, as have small-cap stocks that would normally be hit hard by an interest rate hike. Investors have gone back to a long-term position, and the view looks good.
Of course, instability remains throughout the world and could have an impact on stocks. Oil prices could remain high. Iraq could become far worse after the June 30 transfer of power to an interim Iraqi government.
And the Fed could even decide to hold off on an interest rate hike next month. While many of these events appear unlikely, there's still an element of risk in the markets beyond the usual economic and earnings figures.
The Dow Jones industrials ended the week down 46.13, or 0.5 percent, finishing at 9,966.74. The Standard & Poor's 500 index shed 2.14, or 0.2 percent, to close at 1,093.56.
The Nasdaq rose 7.84, or 0.4 percent, during the week, closing yesterday at 1,912.09.
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