Stock analysts cautious after gains©Associated Press
November 3, 2002
NEW YORK -- It was what investors wanted to see: After hitting five- and six-year lows, the market stages a stunning October rally, raising hopes the month would live up to its reputation as a bear killer.
But analysts say investors shouldn't declare a bull market just yet. Sparked by third-quarter corporate profits that beat lowered expectations, the rally was sustained mostly by buying momentum. That could spell some trouble once investors return their attention to the soft economic recovery.
"During the reporting month, investors just focused on, 'Did companies beat the number,' when earnings expectations were already ratcheted down," said Bernie Schaeffer, chairman of Schaeffer's Investment Research in Cincinnati. "I think we're seeing a relief rally."
Schaeffer sees some market advances in the weeks ahead, but predicts stocks could hit new lows as investor giddiness over the better-than-expected earnings season fades.
"I continue to view the fundamental backdrop as negative and risky," he said.
The Dow Jones industrials and Nasdaq composite posted their third straight weekly advance Friday, a distinction not seen since the period ending Aug. 23, after snapping a six-month losing streak Thursday.
The October rally, which pushed the Dow more than 1,100 points after hitting a five-year low on Oct. 9, gave blue chips their second strongest October percentage gain ever, rising 10.6 percent. It was the Dow's strongest monthly advance since 1987.
But much of the gains came on two weeks of better-than-expected earnings. Investors then shook off a series of bad news this past week, including reports showing consumer confidence at a 9-year low as well as weak employment and consumer spending.
"I am a little surprised the market is a strong as it is given the economic numbers," said Brian Bush, director of equity research at Stephens Inc., earlier in the week. "This market for the last three to four weeks has shown an impressive ability to look past negative news."
That market resiliency is sure to be challenged this month, particularly with midterm elections on Tuesday and the Federal Reserve meeting, where it will decide whether to cut interest rates, on Wednesday. A possible war with Iraq also continues to weigh on the markets.
And another round of data on monthly retail sales and leading economic indicators, which are expected to show mixed results, promises to fluster investors.
"Investors will continue to be confused," said Scott Wren, equity strategist for A.G. Edwards & Sons.
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