http://money.iwon.com/ht/nw/bus/20021228/hl_busn28157412.html Wall Street Ends Third Year of Pain Saturday December 28, 7:56 AM EST By Pierre Belec NEW YORK (Reuters) - The people who got whacked the most in 2002 were the blind optimists who bet against a three-year losing streak on Wall Street. After all, who would have thought stocks would be down for a third year? That's something that hasn't happened in more than half a century. "All that bullishness based on the perceived odds of a two-year losing streak ending was just plain silliness," says Jeff Walker, publisher of the Walker Market Letter. "But the sad thing is plenty of people put their money into the market based on such silliness and the market was not kind to anyone making that mistake," he says. "I am willing to bet we will hear such silliness again this year. What are the odds we will have a 'fourth' down year in a row?" The smart money says predicting a market turn has always been a crazy exercise. But the dumbest thing to do is to rush back into stocks based on a wild contrarian call such as the number of consecutive down years for the market. "To investors' dismay, this generational bear market keeps getting progressively worse," says James Stack at InvesTech Research. "Last year the market experienced a larger loss than in 2000 and this year's decline was even bigger. At this rate, pessimists might expect the market to melt down to zero in no time at all." INTO THE ABYSS In 2000, the Standard & Poor's 500 index sank by more than 10 percent and its slide accelerated in 2001 to 13 percent. This year, the S&P 500 is in bear territory, defined as down more than 20 percent, and is even surpassing the awesome plunge of 29.7 percent in 1974. The S&P 500 hasn't posted double-digit declines for three consecutive years since the Depression in 1932. The Nasdaq index has been a basket case for the last three years, crashing more than 20 percent each year. In 2002, the tech-laced index plummeted nearly 30 percent. Investors are now in opposing camps on the question of whether the market finally struck a bottom in early October when the major stock gauges sank to five- and six-year lows. Much of the speculation is based on the Street's belief that bear markets end at the point of maximum pessimism. Stack's bet: Stay on the fence. Not because it's a comfy place to be, but because the evidence recommends it. The advice for all the whiners out there who are tired of reading bearish stories: The economic reports are conveying a lot of information. And they're saying things just aren't right: -- Final tallies of retail sales for the big Christmas shopping season are expected to be less than spectacular. -- Consumer confidence is weak. -- Gold, the safe haven in times of uncertainty, hovers at a 5-1/2-year high. The bottom line is the current economic and political climate remains unfavorable. WRACKED BY WORRY UBS AG's Index of Investor Optimism released this week says investors continue to cite the issue of questionable corporate accounting practices as being of most concern, with 89 percent of those surveyed saying it is having a negative effect. The other big issue, according to 86 percent of the investors polled, is the threat of more terrorist attacks. Other worries, ranked by the percentage of survey respondents who mentioned them, are the U.S. economy (74 percent); a possible U.S. war against Iraq (71 percent); and corporate earnings (65 percent). Indeed, the equity culture has suffered a lot of damage since the speculative bubble burst in March 2000. Battered and bruised, investors are trying to be enthusiastic about returning to the market. For many, acceptance of risk has just about disappeared and it will take a long time to rebuild their confidence in the market. The mutual fund research firm Lipper Inc. sees more nail biting in 2003. It expects investors will be cautious about returning to the market. For the first time since 1988, people took more money out of stock mutual funds this year than they put in, while inflows into bond mutual funds are on track to break the record of $120 billion set in 1986. HAUNTED BY UNCERTAINTY As the ranks of stock investors shrink, it will be more difficult for Wall Street to mount a sustained recovery. This, in turn, will make it tougher for companies to float new stocks to fund their expansion. The worst bear market in a lifetime has forced struggling companies to rethink their strategies after investors took a jackhammer to their stocks. The problem has been global. Initial public offerings, the traditional way to raise money, collapsed globally by 34 percent this year, according to Thomson Financial. With the economic data pointing in so many different directions, it's not surprising stock investors don't know where to go. Worth remembering is this: The stock market has historically told us how Corporate America will do in the future -- not what businesses are doing today. The economy expanded in the third quarter by 4 percent, but it's expected to grow in the fourth quarter by just 2 percent or less. With consumers pulling in their horns, the concern is that economic growth will be further dampened. And in the absence of free-spending consumers, businesses will continue to stick their heads in the sand and hold back on spending that would stimulate job growth. Corporate earnings in the third quarter rose by 8 percent and the majority of the companies in the S&P 500 beat Wall Street's expectations. "But simply exceeding analysts' estimates is not enough to help stocks go higher," Zacks Investment Research says. "The outlook and the subsequent guidance on both revenues and earnings have a much more significant impact on the direction of the market." A lot of companies were able to generate better earnings by cutting prices to attract customers while offsetting the negative drag from lower sales prices by firing workers. How long can they pull it off? The answer is probably not much longer before their strategies come back to bite them on their bottom lines. On the economic front, uncertainty continues to rule. This issue will be important in deciphering the market's long-term potential, which in turn will be the leading indicator of the direction of the economy. Remember that the Street doesn't handle uncertainty very well. In fact, it hates uncertainty. For the week, the Dow Jones Industrials closed down 2.44 percent, the Nasdaq fell 1.07 percent and the S&P 500 dropped 2.27 percent. (Pierre Belec is a free-lance writer. Any opinions expressed are those of Mr. Belec.) ©2002 Reuters Limited.
If the stock market posts its fourth double digit decline in 2003, methinks Bush Jr's duck will be cooked. People usually vote their wallets.
Not a chance. If we are still in the middle of a war (which is likely) I dont see the American people electing a new president. Money plays a role, yes, but I still doubt Jr. is going anywhere.
The market reacts unfavorably to uncertainty. The uncertainty of war right now is really hurting. The initial few days of a potential Iraq conflict would be bad for the market, but I feel that once there is certainty about the outcome, the market should rally substantially. If the war in Iraq is as short as everybody is predicting, it might not be such a catastrophic event for the equities.
How in the heck would this be short? Kicking their ass in the middle of the desert is a lot different than invading their country with hostile natives using ground forces. The only way it would be short would be if we bombed the crap out of them. If we're sending troops in and trying to take out an entire regime, that's a whole different ballgame, especially if we're worried about civilian casulties. We could lose a lot of our soldiers over this one.
Yes, the business cycle lives. If you look at historical charts, you can envision a stagnant market for another 10 years. btw, the people of Iraq don't like living in a dictatorship. Saddam will fall quickly, because sane people won't die for him. Iraq has great potential, and the United States will help the Iraqi people by giving them an opportunity to realize it.
Everything I've seen and heard about our military strategy includes an initial overwhelming use of force. Most military analysts are predicting the style of fighting will be blitzkrieg-esque. I personally think this is a good idea. We need to avoid a long, drawn out, door-to-door search and destroy process. I believe the market will react very favorably once it is readily evident that the US will accomplish its goal. With a friendly regime in office in Baghdad and continued economic improvement at home, oil prices should be in the low-to-mid twenties, a welcomed change from today's $32/bbl price. This by itself is worth 1,000 - 2,000 points on the Dow, IMO. ...and once we take over Venezuela and claim control of their hydrocarbons, we'll be paying $0.75/gallon to fill up our cars. Ok I'm dreaming.
The length of the war is not the only factor. The current economic "recovery" is weak and jobless so far. The war with Iraq at best would continue the weak trend and at worst would cause a double dip in the recession. Any military action against North Korea over the next two years will also have a similar impact. BTW, the current equity valuations have already factored in a strong earnings recovery, which as of yet we are not seeing. Regardless of the war, the equity markets will likely see another drop next year. The effect of an Iraq war during a falling market will likely accelerate the decline. Postponing the Iraq war until the election year 2004 (and solving the problems with North Korea diplomatically) may be the best political moves for Bush Jr. The economy will likely be fully recovered, strong, and growing again. The war effect of the market and economy may lag the war enough to fall after the election day. And the presidential popularity from a successful military action will also be fresh on voters minds.
