- The Washington Times - Tuesday, December 3, 2002

The best two months of gains since 1987 for stocks on Wall Street has investors hoping that the long bear market may finally be over.
Since bottoming at five-year lows Oct. 9, the Dow Jones Industrial Average has climbed nearly 1,600 points, or 22 percent, fueled by improving earnings performances by leading U.S. corporations and a spate of upbeat economic news.
The Nasdaq Composite Index, with its heavy weighting of technology stocks, has done even better, rising by more than 30 percent perhaps the most promising sign that the grueling 30-month bear market ignited by the implosion of technology stocks in March 2000 may be ending.
But as shown by the market's disappointed reaction to mixed economic reports released yesterday, potholes remain on the road to recovery.
The Dow soared 147 points to more than 9,000 at the open of trading on news of record sales at Wal-Mart and J.C. Penney the weekend after Thanksgiving. But it retraced those gains and then sank as much as 107 points after a report showed that manufacturing remained in recession last month. The Dow ended down 33 points, at 8,863.
"Although we believe the worst of the bear market is behind us, investors still need to be aware of several significant risks to stock prices," said Steve Young, senior market strategist with Banc of America Capital Management.
Many stocks will continue to be plagued by low growth in such distressed sectors as manufacturing, technology and air travel, while the possibility of a war against Iraq still clouds the outlook for the markets and the economy, he said.
The Standard and Poor's 500 Index of blue chip stocks has risen more than 20 percent since Oct. 9, in what normally would define the end of a bear market cycle. But the S&P; did the same in August after touching multiyear lows in July, only to plunge again to worse lows in September, he noted.
Stock investors have grown wary after experiencing many such "dead cat bounces" in the past three years. Many investors bought stocks at what they thought were market bottoms in 2000 and 2001 as well as over the summer, only to see their investments sink to new lows.
Terence A. McCubbin, vice president of Chevy Chase Trust, said investors have been cowed by their humbling experiences during the long bear market.
Despite the market's solid advance since early October, small investors pulled money out of stock mutual funds every month since July and have shown little inclination to reinvest in the market.
The withdrawals from stock funds totaled $91 billion in the five months through October, according to TrimTabs.com. Meanwhile, in their rush out of stocks, consumers have invested billions in bond funds and stockpiled a record $6.2 trillion in low-earning savings deposits and money market funds.
Stocks may be as much as 25 percent underpriced, based on a Federal Reserve model of stock valuation, Mr. McCubbin said. But the market will continue to be held back by "headline risks, looming pension issues, confusing employee stock-option accounting, prospects for war, and continued irrational market behavior."
Despite recent gains, the downbeat mood of the investing public may be reinforced by headlines at the end of the year announcing a third straight year of stock losses the first time that has happened since the Great Depression years from 1939 to 1941, Mr. McCubbin noted.
Other analysts say optimism is growing, and it may even be at the contagious stage. Bullish sentiment on Wall Street has soared in recent weeks, with bulls outnumbering bears 2-to-1 in recent surveys of investment managers.
"More and more investors now think Oct. 9 was the last day of the bear market," according to a report from S&P;'s investment policy committee. "Some may even be concerned that they may miss this rally and now want to participate."
S&P; noted that "one reason for the increased conviction is the lack of alternatives."
Bond prices are due to decline in coming months as the economy recovers and interest rates rise, while uncertainty clouds the outlook for foreign stocks, and soaring house prices and commercial vacancies have made real estate investment increasingly dubious.
"We are impressed by the strength and breadth of recent rallies and by the smooth way in which profit taking is being absorbed," S&P; said. "Economic news lately has been modestly positive. But stocks seem to be benefiting mainly from improved psychology."
Barker French, chief investment strategist with Brinker Capital, said stocks are poised for a smashing performance in 2003, based on several trends that historically have boded well for the market.
One of those is the substantial undervaluation of stocks seen in the Fed's model and various others used by stock analysts.
In addition, the pre-presidential election year has given the market a "bump" in every such year since the 1800s, Mr. French said. Since the 1950s, stocks have gained an average of 18 percent in the third year of a presidency, he said.
The worst of the "Iraq panic" most likely is over, Mr. French said, as the market has taken into account any economic problems that might occur from a spike in oil prices caused by another Persian Gulf war.
"If the war takes place in the coming weeks, it will relieve the anxiety now holding back the markets." Obviously, the markets also would rally if no war breaks out, he said.

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