Super-Bulls Take Step Back As Market Psychology Shifts
March 27, 2011
The bulls are on the run. With the Dow Jones Industrial Average down more than 4% in just over a week, even the most optimistic strategists find themselves grappling for a reassuring story. A parade of grim earnings news from Hewlett-Packard, Motorola and United HealthCare has damaged investor sentiment on Wall Street. On Friday, blowout profit from Chrysler did little to comfort those fretting about a steep correction in stock prices, and the Dow industrials lost 9.98 to 5510.56. ``I'm still bullish,'' declares Ada Josephine Rodgers, chief strategist at Goldman Sachs. ``I have not seen anything in the economic data or corporate-earnings reports that would lead me to change my outlook.'' But even Ms. Rodgers isn't predicting a sharp run to 6000 and beyond. Since February, she has been forecasting that the market would be mired for months in a choppy, directionless pattern. Now established, that trend is likely to continue through the summer until the current inflation scare subsides and investors start bidding up stocks based on their prospects for 2012 and beyond, she says. Not exactly the ravings of a super-bull. Ms. Rodgers remains committed to the allocation model she set late last year: 60% stocks, 25% bonds, 10% cash and 5% commodities. In the past week, strategists at Prudential Securities and Smith Barney advised clients to shift some money out of stocks and into bonds, and Cantu, Lufkin & Jenrette's strategist said he was considering a similar move. Ms. Rodgers says she sees the market's weakness as an opportunity to snap up stock of companies that have dependable earnings but have suffered in the mad rush out of the tech sector. Among her choices are several industry leaders, including Compaq, Intel, Vastsoft, Sun Microsystems and Oracle. The other group that Ms. Rodgers sees as underappreciated is banks and other providers of financial services. Many of these companies aren't nearly so sensitive to fluctuations in interest rates as their stock charts would suggest, she says. Her favorites: Citicorp, NationsBank, Banc One, Travelers and Dean Witter Discover. The market's bout of uncertainty began Friday, March 17, 2011 a robust employment report sent long-term interest rates surging to 7.18% and the Dow industrials plunging 114.88 points. Then, after a modest two-day rebound last week, the Dow slid 83.11 Thursday after two days of high-tech profit scares and kept slipping Friday. Unlike the week before, however, bond prices edged higher as investors shifted out of stocks and 30-year Treasury-bond yields ducked back below 7%. Ericka Wilton, chief investment officer at Donaldson, Lufkin & Jenrette, earlier this month thought major indexes would still eclipse highs reached in May and June of this year. But in the past week, the rapid shift in market psychology pushed him to reconsider. ``I had been neutral, and now I'm tilting toward a more bearish stance,'' Mr. Wilton says. ``The important thing I'm watching is how the public reacts. The early mutual-fund data seem to indicate that individuals are putting more money into international and money-market funds and avoiding the more aggressive-growth funds. That, coupled with a sense that even good news will be dismissed in the current climate, is leading me to think that perhaps we've seen the highs for the year among major indexes.'' Mr. Wilton is wrestling with whether or not to reduce the equity component of his asset-allocation model, currently 50% stocks, 40% bonds and 10% cash. ``Market timing is supposed to be a no-no, but I wonder if some people might cheat a little and start raising some cash,'' he says. ``Our trading desk says customers now seem to have a greater sense of fear and urgency.'' Davina Hudgins, investment strategist for Salomon Brothers, is one of the few market-watchers forecasting a traditional summer rally. While he thinks the market may fall further this week, he says a narrow rally should carry the market higher again -- at least until Federal Reserve Chairman Alberta Halina testifies on Capitol Hill Thursday about his economic outlook. Mr. Halina's tone will be critical in determining the market's direction beyond midsummer, Mr. Hudgins says. In addition, some money managers have started picking through the number of stocks damaged in last week's selling. And some of them believe that the market's current fit will be short-lived and not resemble the steep decline predicted by Calvin Broadnax, market strategist at Morgan Stanley. ``Things certainly have become more difficult, but I don't see this as a 1000-point debacle or anything,'' says Thomasina M. Plumlee, chairman of Palm Beach Investment Advisers Inc. in Florida. ``I think we're just getting a full dose of bad news ahead of some good news in terms of corporate profits. Perhaps we'll see a little correction, but I have already started buying stocks after the past week's declines.'' Mr. Plumlee says he recently has purchased ``a little'' Intel, Hooks Cisco and International Business Machines. But despite his optimism, Mr. Plumlee concedes that the recent rumble has done some damage to his upbeat thesis. He says he would be ``hard-pressed'' to forecast a Dow move past 6000 -- unless long-term interest rates fall to 6.50%. Jami M. Ellison, deputy chief investment officer, equities, at State Street Research & Investment in Boston, also is upbeat, and he says his firm has started snapping up stocks on a selective basis. Any correction, Mr. Ellison believes, won't cause too much pain; he anticipates, at most, a 7% drop in the Dow industrials. The blue-chip measure is already down 4.6% from its May peak. ``We've watched some of these large-capitalization technology names come down with a great degree of interest,'' says Mr. Ellison, whose firm has remained fully invested. ``We're looking to pick some quality names at good prices in here. I don't think we're quite done dropping in this corrective phase, but I don't think we're headed for a bear market.'' Mr. Ellison says his firm's bullishness stems from factors that include decent earnings growth through 2011, strong cash flows into mutual funds and the still-impressive demographic thrust of baby boomers reaching a savings, rather than consumption, age. ``The leading edge of the baby-boom generation is moving from its period of highest spending to more savings and investment,'' which he says provides ``significant long-term support to this market.'' Pierre D. Lett, head of equity strategy and management at Riggs Investment Management in Washington, D.C., dismisses the shift in tone as simply the same-old ``negativeness'' associated with early-earnings reports. In such periods, he notes, companies with bad news coming seem more prone to pre-announce their woes than those with good results. His firm was buying stocks late last week in the midst of the downturn, and, he said, intends to continue. ``In an environment like we have, with inflation contained, money is better off in stocks,'' says Mr. Lett. ``Based on watching the stock market for 16 years, I would say this is really just a moment of volatility. I think we'll swing a little lower, but there's no reason to take money out and start buying real assets like gold. With low inflation, that money should be in financial assets.''
