- The Washington Times - Monday, June 30, 2003

The stock market yesterday ended its best quarter in years, extending a rally that added as much as 27 percent to major indexes from lows touched in March.

A debate is raging on Wall Street over whether stellar gains since the bottoming of most major indexes March 11 represent the beginning of a bull market or another trap in a 3-year-old bear market.

Upbeat stock analysts point to barriers broken this spring by the Standard & Poor’s 500 index, which had its best quarter since 1998, and the Dow Jones Industrial Average, which posted its best quarter since 2001. They say ground has been broken for further gains as long as the economy and earnings keep improving.

“Investors may actually be eager to open their financial statements for the second quarter” after years of watching their stock funds shrink with each quarterly statement, said Steve B. Young, chief investment strategist at Banc of America Capital Management.

The Dow surged above a 10-month trading range more than a week ago before sliding back as the market consolidated in the last week, Mr. Young noted. Yesterday, the Dow ended down three points at 8,985 — leaving its gain for the quarter at 12.4 percent and its gain since March 11 at 18.3 percent.

The technology-heavy Nasdaq Composite Index posted even more impressive gains of 21 percent for the quarter and 27 percent from the March lows. The Nasdaq ended down two points at 1,623 yesterday.

Some skeptics question whether the markets can rise much further, given the uncertain economy, but Mr. Young said stocks are likely to become more attractive. Investors have stowed away more than $2 trillion in money-market accounts and are receiving low returns.

“There may still be support for higher stock prices,” he said.

Prudential Securities says it also believes that the record amounts of cash in bank deposits and money-market funds will provide fodder for another bull market, though it may not be as long and robust as the record 1990s bull run.

The Wall Street firm notes that most of the stock-index benchmarks have held, even with last week’s setback. The S&P 500, for example, broke through the 965 ceiling of its trading range on May 30 and ended at 975 yesterday.

Ed Yardeni, Prudential’s chief investment strategist, said stocks have room to grow, despite historically high valuations, because of extraordinarily low interest rates engineered by the Federal Reserve, tax cuts and increasing disposable incomes.

“For continued market appreciation to happen, we need to get the economy growing,” Mr. Yardeni said.

But he is optimistic that American consumers will redouble spending in coming months as they receive an estimated $65 billion in tax cuts and rebates that further increase disposable incomes.

Even before the tax rebates hit consumers’ mailboxes in the next few weeks, disposable incomes have increased at an unusually high rate of 5.5 percent — fully two percentage points above the growth in incomes before taxes are deducted, Mr. Yardeni noted.

Consumers also have as much as $200 billion in cash taken out of their home equity through mortgage refinancings, he said. That money also is available to spur growth in the economy and stocks.

“Consumers have never been more liquid,” Mr. Yardeni said, estimating that many have as much as a half-year’s household income sitting in cash deposits.

Small businesses also are poised to add to economic growth because of newly enacted tax deductions allowing them to write off $100,000 a year in technology and other investments, he noted.

A slump in business spending has been blamed largely for the anemic economic growth rates of recent quarters, he said.

Many analysts, however, are skeptical about the market upturn. They note in particular that the technology-stock rally is justified by small increases in orders and earnings.

“A sustained bull market is not a sure thing,” said Sung Won Sohn, chief economist with Wells Fargo & Co. “This could be another bear-market rally.”

While Mr. Sohn is optimistic about a recovery, he says the economy continues to reel from the collapse of the 1990s stock market bubble and overspending on technology.

“The economic imbalances of the go-go ‘90s are so serious that it will be awhile before the economy gets back on its feet,” he said.

Paul Gulden, manager of the Pax World Growth Fund, says he believes the tech-stock rally will endure, but the winners will not be the big names of the past. He says a new generation of firms will build on achievements in the Internet and medicine.

“We are concentrating less on the tech stocks of the last bull run and more on the survivors of the Internet bubble and newer companies that may have major growth potential,” Mr. Gulden said.

But many of the old-line tech firms, he added, will continue to post decent growth rates.

Standard & Poor’s questioned whether the run-up in biotechnology stocks was justified, asserting in a note to clients that investors’ enthusiasm was reminiscent of the era of “irrational exuberance.”

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