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Investors: The party's still over
By HELEN HUNTLEY, Times Staff Writer
© St. Petersburg Times The stock market surged ahead in the waning months of 2001, but many twice-burned investors are still feeling cautious as the new year begins. Could we be on our way back to the glory days of the 1990s? They aren't counting on it. "We've rallied so far, so fast, but the economy really hasn't turned around yet," said St. Petersburg money manager Timothy McIntosh at Strategic Investment Partners. While he thinks a pullback is likely, he said history still gives him hope 2002 will end on a positive note. We've just suffered through the first back-to-back losing years for stocks since the 1970s; surely we couldn't have another one, he reasons. "The last time we had three down years was 1939, 1940 and 1941, so I doubt we'll have that," McIntosh said. To avoid a three-peat, investors will have to maintain faith that economic recovery is coming soon. Right now there are plenty of believers, but the mixture of hope and fear pervading the country has even optimistic investors thinking small. "I feel strongly that we're near the bottom," said Tampa investor Kent Fast. "We've got to be. The only question is how quickly it's going to come back up. Unfortunately, I don't think it will be real fast." A transportation planner for the state, the 51-year-old calls himself a "tiny" investor. "Like many people, I'm just trying to get my act together," he said. As 2002 begins, managing money seems particularly tough. Some workers joke that their 401(k)s are now 201(k)s, but it's no laughing matter if your retirement plans were built on bull-market projections. Although the dot-com meltdown occurred in 2000, the hangover lasted well into 2001 and it may not be over yet. Last year, the widely-watched Dow Jones Industrial Average and the Standard & Poor's 500 Index, a proxy for many retirement account investments, turned in performances disappointingly similar to their results in 2000. The Dow fell 7 percent to close at 10,021.50, while the S&P was off 13 percent, closing at 1,148.08. The Nasdaq Composite Index showed improvement, but still fell 21 percent to finish at 1,950.40. "It's a year that all of America is pleased to have behind us," said Clearwater financial planner Ray Ferrara at ProVise Management Group. "A year ago, the consensus opinion was that we would avoid the R word (for recession), which we didn't, that the market would be down early in the year and then up later in the year, which it was and then wasn't. But who could possibly have predicted or thought that anything close to what happened on 9-11 could occur?" Well before terrorists attacked the World Trade Center and the Pentagon in September, the United States was in a recession, though it hadn't yet been officially labeled, and stocks were in a serious bear market. But analysts thought they could see a turnaround on the horizon. Then attacks shut down stock trading and put hopes for economic recovery on hold. Would-be travelers stopped flying, companies fired thousands of workers, the United States began bombing Afghanistan and the world held its breath waiting for the next terrorist attack. Investors responded with a vicious selloff when the markets reopened, sending stocks to their lows for the year on Sept. 21. Since then, stocks have erased their post-attack losses and more. The Dow is up 18 percent from its lows while the Nasdaq Composite Index is up a remarkable 27 percent. But stocks still have a long way to go to recover all their lost ground. From their 2000 peaks, the Dow is still off 15 percent, the S&P 25 percent and the Nasdaq a whopping 61 percent. Market analysts say the strong finish to last year is a positive sign, but far from proof that the bear is safely back in hibernation. "November, December and January are the three strongest months of the year historically, so we're looking for a favorable bias going at least into the early part of the year." said Art Huprich, technical analyst for Raymond James & Associates in St. Petersburg. On top of the year-end momentum, stocks normally get a January boost from new contributions to retirement plans and the investment of year-end bonus money, although there wasn't much of the latter this year. The question is what happens after that early-year infusion. "It will be wise to continue to take the market on a day-to-day basis," Huprich said. Largo money manager Gerald Perritt said he expects a challenging, volatile year. "The middle of an economic recession is usually when the market hits bottom," he said. "You put everything together and the market has bottomed relative to economic activity. But it's pretty hard to get super-euphoric over the stock market because we're going to face the prospect of higher interest rates and most likely higher oil prices." Many investors say they are sticking with stocks because their other alternatives don't look any better. "Historically, stocks have done well, and I don't go out and make a lot of changes just because the market is changing," said Treasure Island investor Ray Bradshaw, who says he keeps about a third of his money in stock funds. The retired businessman said the past two years have taught investors the value of diversification. Aggressive investors who went overboard for technology stocks have suffered, but so have risk-averse investors who kept most of their money in short-term accounts such as certificates of deposit and money market funds. "If you've got a high ratio of CDs and you're living off the income from those CDs, next year is going to be pretty tough," Bradshaw said. "If they reduce the rates any more, we're going to have to pay the banks to hold our money," he joked. To stimulate the economy, the Federal Reserve Board cut short-term interest rates 11 times last year, sending them down to 40-year lows. CD investors who had been earning 6 or 7 percent on their money suddenly found banks offering them 3 percent, or even less. Some money market funds now pay 1 percent. Low rates for cash and falling stock prices helped boost the popularity and the prices of bonds. But in the long run, buying bonds may not be any safer than buying stocks. Most bonds that pay attractive rates are redeemed early, forcing investors to reinvest at lower rates. And if the economy begins to recover and rates rise this year, bond prices will go down. "You don't want to be buying long-term bonds at the bottom of the cycle," said New Port Richey financial planner Steve Athannasie at Trademark Capital Management. He said investors who have stuck with stocks as part of their portfolios will eventually be glad. "For those buying, it's been a great time, especially if you are a longer-term investor," he said. "It's a matter of being well positioned for the next upturn. People getting out at these levels will look back in 12 to 16 months and regret it." One reason many investors still feel cautious is that the outlook for corporate earnings is so fuzzy. Ultimately, earnings support stock prices so if earnings fall, stock prices could too. "When earnings start to fall, they generally fall a lot further than all of us think," said Perritt, who manages the Perritt Microcap Opportunities Fund. But he said the reverse is also true: "When earnings start to ramp up, they tend to go a lot higher than all of us think. If the economy does turn up as everyone expects, you'll start to see earnings estimates being constantly raised." Most analysts expect modest growth in earnings this year for companies with stocks that are part of the Standard & Poor's 500 Index, but the forecasts are frequently revised. Perritt, who admits he's prejudiced, thinks the smaller stocks he invests in offer the best opportunities for the year ahead. "People say valuations on the S&P 500 and the Dow are high, but you cannot say that about the small cap sector," he said. "They're low and the smaller the company, the lower the valuations. Some companies that have continued to grow at 15 to 18 percent in this environment are selling at eight to 10 times earnings" per share. By comparison, some deflated larger stocks are still selling for more than 20 times earnings. The Russell 2000 Index, which tracks smaller stocks, was among the few to finish in positive territory for 2001. Tampa money manager Dee Howland said smaller stocks also are popping up on the computer screens she uses to find stocks that might be attractive values. But she says investors should use care. "Those come with the increased volatility and higher risk than large stocks do, so you have to factor that in," she said. One upbeat sign for the year is that investors have shrugged off so much bad news, from troubles in Argentina and the Middle East to Congress' inability to agree on a package to stimulate the faltering economy. Clearwater market analyst William I. Ferree Jr. said we could be on the verge of a broad new bull market, but he also was optimistic a year ago. He suggests paying close attention to the market's movements this month because January often sets the tone for the year. "Early January is usually a critical time of breakout or breakdown, with frequent false moves," he said. - Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.
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From the Times Business report
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