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Stock Investors Ask: What's the Next Big Thing?

Tuesday, 09 Mar 2010 08:19 PM

 

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A year after the stock market began its comeback from 12-year lows, investors are looking for the next big thing.

Stocks have lost some of the momentum that propelled the Dow Jones industrial average up 4,017 points, or 61.4 percent, from its close of 6,547 on March 9, 2009. That's natural — bull markets tend to slow down as they head into their second year. But the lethargic pace of the economic recovery has also been a drag on stocks. And so investors are waiting for signs that the economy is ready to put up some solid, sustainable growth numbers.

The most likely trigger: job growth. Investors need to see a Labor Department report that says employers are creating more jobs than they're cutting.

Until then, investors are going to stay cautious. Analysts say the market is likely to move sideways or drift higher, as it's been doing over the past few weeks. Tuesday's trading fit the pattern of modest moves. The Dow rose just under 12 points. The index is up 1.3 percent so far this year.

But that doesn't mean the market isn't going to have its fitful moments. And it certainly has volatile industries that are expected to move the rest of the market. On Tuesday, the financial companies that led stocks higher in the past year again drove trading. Analysts said financial shares rallied as investors reacted to rumors that the government might prohibit the trades known as short sales in stocks of companies it owns. The government has large stakes in Citigroup Inc., American International Group Inc. and mortgage companies Fannie Mae and Freddie Mac after bailing them out during the 2008 financial crisis.

The market began its ascent last March 10 after Citigroup, the big bank most wounded by the credit crisis and recession, said it had turned a profit. Signs that the housing market was starting to turn around added to the momentum.

At the time, such news, which amounted to glimmers of hope, was enough for investors. With stock prices so much higher now, they want proof.

"A lot of the gains we already enjoyed have been in anticipation of economic progress which has not yet occurred," said Lawrence Creatura, portfolio manager at Federated Clover Investment Advisors.

Besides jobs, investors need to see more strength in the housing market. Traders have been tolerant of recent declines in home sales, but if those numbers don't pick up, investors are likely to become uneasy.

First-quarter earnings reports that will be issued next month need to show continued sales growth. Companies' results for the last three months of 2009 were better than expected. Now investors want to know that demand, starting with consumers, is rising.

Adam Gould, senior portfolio manager at Direxion Funds in New York, said he will be looking for at least two months of back-to-back gains in job growth and for the unemployment rate to fall below 9 percent to feel more comfortable about the pace of recovery. Unemployment stands at 9.7 percent.

Even if the news improves, just holding the gains of the last year could be tough. Some of the market's big rallies in past years were followed by slumps. In the first year of the 1982-87 bull market, the Standard & Poor's 500 index jumped 58 percent. In the second year, the index fell 14.4 percent.

Still, that doesn't mean that's what will happen this time. In 2003, the S&P 500 index rose 26.4 percent. Then, in 2004, it peaked early and fizzled, until a 10.7 percent surge late in the year lifted stocks.

The Dow on Tuesday rose 11.86, or 0.1 percent, to 10,564.38. The Dow remains 25 percent below its peak of 14,164.53, reached in October 2007.

The S&P 500 index, the barometer favored by professional investors, rose 1.95, or 0.2 percent, to 1,140.45. The index is up 68.6 percent in the past year. Including dividends, it's up about 72 percent. It is still down 27 percent from its high of 1,565.15, also reached in October 2007.

And the Nasdaq composite index rose 8.47, or 0.4 percent, to 2,340.68. The Nasdaq is at an 18-month high but still down by more than half from its peak reached 10 years ago Wednesday. On March 10, 2000, it rose to 5,048.62 at the height of the dot-com bubble.

Advancing stocks narrowly outpaced those that fell on the New York Stock Exchange, where volume came to 5.2 billion shares, compared with 3.9 billion Monday.

Even after the U-turn of the past year, the market has given investors back only about half of what they have lost. The rebound has created $5.7 trillion in shareholder wealth. But the total value of U.S. stocks is still down by about $5.5 trillion from the market's 2007 peak, as measured by the Dow Jones U.S. Total Stock Market Index, which tracks nearly all U.S.-based companies.

Investors are going to make much smaller bets than they made a year ago as they look for clues about the economy. They'll also be trying to anticipate when the Federal Reserve will start raising interest rates from their current record low levels. Policymakers have kept rates low to stimulate lending and help the economy. And Fed Chairman Ben Bernanke has predicted rates will stay where they are for some time.

Still, the Fed eventually will have to raise borrowing costs to help keep inflation in check. Investors' fear is that rates might rise too quickly and could choke off the recovery.

Although stocks have only been creeping higher so far this year, some analysts still see some worrisome signs that investors could become overenthusiastic.

Jeffrey Frankel, president of Stuart Frankel & Co. in New York, believes investors are becoming too complacent.

Frankel points to the movement in a stock like Apple Inc. as a sign that investors are letting greed take over. Apple been setting new highs in recent weeks and is up 5.8 percent in 2010. In the past year, it jumped 168.3 percent.

"You're having wild moves in stocks again. You're having a herd mentality chasing stocks," he said.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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