Wall St. faces new year,
same challenges

Corporate profits, the economy and
stock prices are murky despite
an upbeat mood

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By Lisa Singhania
Associated Press

NEW YORK >> For all the anticipation on Wall Street about a fresh start and big rally in 2002, there's an undeniable sense of deja vu in the market.

Although the economy is showing some improvement and stocks have rebounded from their post-Sept. 11 lows, the market is still dealing with many of the same problems it faced last January. The outlook for corporate profits, the economy and stock prices remains murky despite bullish assessments by some market watchers and a more upbeat mood on the Street.

With that kind of ambiguity, market watchers say, investors should proceed cautiously and remember the lessons of 2001.

First, it is important to keep expectations realistic and not hope for too much from a market still very much in transition.

Stocks have rallied significantly the last three months, rebounding dramatically from the lows that followed the Sept. 11 terror attacks. Wall Street is banking on an economic turnaround by the middle of next year, along with a strong gain in stock prices. But remember, investors hoped for the same in 2001, and the strong rally of last January and February fizzled.

Although there is more stimulus in the economy now than a year ago, including the lowest interest rates in 40 years and level energy prices, it's very hard to predict how much business will grow.

"Everyone is pricing this market based on a 15 percent recovery in earnings or better," said Bill Barker, investment consultant at RBC Dain Rauscher. "The risk is that doesn't happen, that the economy grows much more slowly in 2002 than everyone expects."

There's also still considerable political uncertainty. Tensions continue to build between nuclear powers India and Pakistan. Another terrorist attack on U.S. soil, which government officials still say is a possibility, could also upset the market.

Lesson No. 2 is valuations. The major stock indexes and many stock prices are expected to end the year below where they started, but that doesn't mean there are bargains everywhere -- particularly when it comes to the battered technology sector.

Although many stocks in the sector are at lower prices than at the beginning of 2001, some of those values are at multiples 50 to 60 times higher than actual expected earnings in 2002. That's more than twice the level that many analysts are comfortable with. And most tech companies say they still don't know when business will improve significantly.

That hasn't stopped Wall Street. The Nasdaq composite index is up about 40 percent from the low reached in September, and several tech stocks have advanced even more. In the last three months, Intel's stock has climbed about 68 percent, while Gateway has just about doubled.

"The buying isn't on the fundamentals right now, but on expectations," said Rafael Tamargo, director of equity research at Wilmington Trust. "People really want to be in these names, but I think they may be a little bit ahead of themselves."

If that sounds familiar, consider lesson No. 3: diversification. Barker, the RBC Dain Rauscher consultant, said the danger of an infatuation with technology is that like, in 1999 and 2000, investors might ignore other parts of the market with more stability or better earnings prospects.

"It is remarkable to me how they all gravitate to this tech sector," he said. "I mention retailing stocks, for example, and their eyes roll back in their heads."

Besides non-tech blue chips, investors should also consider bonds, so that their risk is spread across several sectors.

"People who were diversified in both bonds and stocks had a much better year in 2001," said John Ryding, chief market economist for Bear Stearns. "The bond market posted fairly decent positive returns, whereas the equity market was down slightly."

The week was positive for Wall Street with the Dow rising 101.65, or 1.0 percent. The Dow advanced 5.68 yesterday to close at 10,136.99.

The Nasdaq composite index was also higher, climbing 41.43, or 2.1 percent for the week. It rose 10.84 yesterday to 1,987.26.

The Standard & Poor's 500 index finished the week up 16.13, or 1.4 percent after advancing 3.89 to 1,161.02 yesterday.

The Russell 2000 index rose 9.60, or 2.0 percent, for the week after gaining 1.00 to 493.62 yesterday.

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 $10.818 trillion, up $173.76 billion from the previous week. A year ago the index was $12.175 trillion.