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Opinions vary widely on market's status

Have stocks hit bottom? It depends on your definition.

Compiled from Times wires

© St. Petersburg Times, published April 4, 2001


WASHINGTON -- Despite more trouble on Wall Street, the U.S. economy may be close to hitting bottom after a sharp decline from the robust growth that prevailed during the boom years, some analysts said Tuesday.

The only problem is it may remain stuck in a slow-growth state for much of this year, they said, before the outlook begins to brighten significantly with the approach of 2002.

"I would think that we are close to the bottom here," said Paul Kasriel, economist at Chicago's Northern Trust Co., in a comment echoed by many experts. "But the upside doesn't look all that great."

"At the moment, we are about as close to being in a recession without exactly being in one as we can be," said Bruce Steinberg, chief economist at Merrill Lynch, who added he doesn't foresee a recession. "I don't think the economy will show any significant growth until the final quarter."

Kasriel, Steinberg and other economists cited good automobile sales in March, a pickup in construction activity, the shrinking of inventories, a small rise in consumer confidence and the prospect of more interest rate cuts by the Federal Reserve Board.

At the same time, they were not as firm in their assessments as they might have been because the stock market continues to plunge, driving down the size of once-soaring portfolios that had led Americans to spend freely.

Other experts are using a rather chilling indicator to suggest the market's fall could get much worse: By historical measures, stocks still are expensive. The most bearish predictions call for the Dow Jones Industrial Average to fall below 5,000, and the Nasdaq Composite Index below 1,000.

"These prices have no precedents in history, most of them," said Fred Hickey, who writes the High-Tech Strategist newsletter, which turned bearish amid a slump in personal computer sales more than a year ago.

Hickey's views are in the minority on Wall Street and also are controversial; some experts say Hickey and others are using measures that are too simplistic.

At the heart of the disagreement lies the most widely used measure of whether stocks are overpriced or not: the price-to-earnings ratio. The P/E ratio shows how much investors are willing to pay for a stock relative to its earnings. P/E ratios on entire indexes are often used to discern the perceived value of a market.

The ratio is easy to calculate -- divide the price of a stock by its current or expected per-share earnings. The ratios can be determined for indexes and companies.

By historical standards, the price-to-earnings ratios of the overall market look dramatically high. The P/E of the Nasdaq, for example, is 107, compared with a monthly average of 50 since late 1985. If it returned to that level, the Nasdaq would be trading around half its current level.

But Ed Kerschner, the bullish UBS Warburg analyst, finds such analysis ridiculous.

"It is extremely naive to compare the P/E of stocks today to the P/E of 1987 or 1990, or in any of the past 30 years, given the completely different interest rate and inflation environment that exists today," he told clients last month.

David Blitzer, S&P's chief economist, said investor psychology could make analysis of interest rates, inflation and P/Es useless.

"Not that long ago, people were paying over 100 times earnings for Cisco Systems Inc., and now if I say Cisco with more than three people in the room, someone gives me a dirty look," he said, noting the gloomy outlook on many technology stocks. "There's a lot of turmoil and churning. I'm not convinced we've seen the bottom, but if we haven't, I don't think we've got a lot farther down to go."

- Information from the Chicago Tribune and Philadelphia Inquirer was used in this report.

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