- The Washington Times - Saturday, October 12, 2002

The stock market ignored disappointing economic news yesterday and continued its rebound from five-year lows, with the Dow Jones Industrial Average soaring 316 points to 7,850.

Wall Street's powerful rally was stoked by a rare good earnings report from General Electric and a brokerage upgrade of IBM, despite evidence that consumer spending the engine of economic growth plunged in the past month as consumer sentiment sank to a nine-year low.

Relieved that the consumer retrenchment was not any worse, all the major indexes joined in a broad celebration, with the Nasdaq Composite Index surging 47 points to 1,210 and the Standard & Poor's 500 Index jumping 31 points to 835.

The Dow's two-day advance of 564 points was the largest since the boom days of March 2000.

"The market dodged bullets," said Bryan Piskorowski, market commentator with Prudential Securities, noting that even retail stocks "bucked" news of weakened consumer confidence and posted gains. Investors are anxiously waiting to see whether the rally lasts.

"It's a solid session, but it's hard to enjoy in the moment, knowing recent history," he said.

"GE is really the bellwether of the market," said John C. Forelli, portfolio manager for Independence Investment LLC. "If the company can lead us out of this, I think it will give investors some confidence."

The unexpectedly positive reaction to discouraging news from retailers in the past two days suggests "a lot of pessimism has been built into the market," creating opportunities for stocks to rally, he said. But he also questioned whether the rally would fizzle in coming days.

Investors have been cowed time after time as the bear market unfolded in the past 2½ years, with each rally fading into a round of losses and new lows for the indexes.

Jeffrey Applegate, chief investment strategist at Lehman Brothers, called it a "very good sign" that the market rallied in the face of the reported lull in consumer spending during September.

"In a very bear market, you have a process where even though the news flow is still bad, the market has more than discounted the bad news to come, bottoms out and starts to go up," he said.

Analysts say the market appears to have made a classic "double-bottom" this summer, dipping to five-year lows in late July and then touching or exceeding those lows again in the last week before rebounding strongly.

Such "double-bottoms" often mark the end of a bear market and the beginning of a bull run that can last from months to years.

Henry Cavanna, investment manager at J.P. Morgan Fleming Asset Management, said he doubts the rally will last.

"This is a temporary snapback, not a change in the market's downtrend," he said.

"General Electric shares are a great barometer of this stock market, because they've gotten a lot cheaper and they've gotten to the point where they can bounce back if the news just isn't getting worse."

GE sparked yesterday's rally by matching earnings forecasts. A recommendation from Lehman Brothers to buy IBM shares because it is likely to perform up to expectations triggered a big rally in technology stocks.

Analysts said some of the past two days of gains were technical, fueled by a surge of buying by short-sellers who made losing bets that stocks would continue to fall.

But Gary Tapp, analyst at SunTrust Robinson Humphrey, said pessimism is running so deep on Wall Street that stocks had been priced as if a recession were coming, even though most forecasters expect the economic recovery to continue and even pick up speed next year.

"If we scrape through without a recession, you've got the potential for a pretty large snapback" in stocks, Mr. Tapp said.

Yesterday's economic news added fuel to the debate over the economy. The University of Michigan reported a big drop in its index of consumer sentiment to levels not seen since 1993.

The 1.2 percent drop in retail sales reported by the Commerce Department came after a three-month string of equally large increases, prompting most economists to say it was only a temporary stall in the engine of consumer spending that has kept the economy growing this year.

But Fred Karp, economist with DRI-WEFA forecasting group, said he believes it is the start of a cooling trend that will continue during the critical Christmas season.

"Consumers who account for two-thirds of economic activity were clearly discouraged last month by the ongoing debate over a war with Iraq, coupled with conflicting reports about the health of the U.S. economy," he said.

"This climate of uncertainty" will continue until these issues are resolved, he said, adding that it in particular is prompting consumers to put off discretionary purchases, such as vacations and luxuries.

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