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Scaling the Wall of Worry

In classic fashion, the stock market continued to overcome formidable economic and global obstacles

October 06, 2003|Tom Petruno | Times Staff Writer

The stock market this year has proved again that a wall of worry is made for climbing.

The surge in share prices that continued through the third quarter has defied skeptics who said that stocks had no good reason to rebound and plenty of better reasons to stay in the dumps.

Instead, as Wall Street nears the one-year anniversary of the long bear market's apparent demise, the bulls seem very much in control.

"This market is just chewing through people who are still negative," said Ed Larsen, chief equity officer at AIM Capital Management Inc. in Houston.

Owners of stock mutual funds will see that in their quarterly statements: The average domestic stock fund rose 4.5% in the quarter ended Sept. 30, bringing the year-to-date average return to 18.3%, according to data firm Morningstar Inc. in Chicago.

That leaves the funds well on track to post their first calendar-year gain since 1999.

In some fund categories, the recovery has meant spectacular paper profits for investors who were smart enough, or lucky enough, to put money to work early this year.

The average fund that focuses on small-company "growth" stocks was up 28% in the first nine months. Funds that target stocks in emerging-market countries were up 31.2%. And technology funds, ravaged in the bear market, were up 37.4%, on average.

The numbers would be considered generous in any environment, but they may be more so given what stocks have faced: a formidable wall of obstacles that argued for prudent investors to stay away.

Yet one of the oldest lines on Wall Street is that the market loves to climb a wall of worry: That is, when the obstacles are well known to all, the surprise often is that the market scales them.

This year has been a classic case of exactly that, Larsen said.

The first major sign of hope this year came in March, as the approach of the war in Iraq failed to send major market indexes under the five-year lows they had reached on Oct. 9, 2002. And once the fighting began, stocks zoomed.

As the rally continued into spring, it wasn't fazed by Federal Reserve warnings about the risks of deflation, which stirred nightmarish thoughts about the U.S. economy following Japan's path.

Through the summer, stocks held on to their gains despite recurring fears that the economic recovery would stall out at any moment and despite rising violence against U.S. troops in Iraq.

The market's biggest scare in the third quarter came in late September, as concerns about a continuing net loss of jobs and other soft economic data triggered a spate of profit taking.

It may not have helped that New York Atty. Gen. Eliot Spitzer last month uncovered a rash of illegal or improper "timing" trades in mutual fund shares by favored big investors -- a scandal that threatens to undermine small investors' confidence in the fund business.

But by last week, buyers were rushing back into stocks. In a week capped by Friday's government report that the economy added jobs in September for the first time in eight months, the blue-chip Standard & Poor's 500 index gained 3.3% to close at 1,029.85. That left it less than 1% below the 15-month closing high set on Sept. 18.

Measured from its five-year closing low of 776.76 set on Oct. 9 of last year, the S&P index has soared 32.5%. The Nasdaq composite index, dominated by technology stocks, has rocketed nearly 69% in the same period.


Pros Are Reluctant to Call It a Bull Market

Yet many market veterans aren't sure what to call this rebound. Historically, after a deep slide in share prices a rise of 20% to 25% in major indexes over an extended period has qualified as a new bull market.

This time, many pros are reluctant to sound too comforted by stocks' performance. Given the devastation wrought by the three-year bear market, there still is a lot of talk that this rally could be a flash in the pan.

One of the biggest doubters on Wall Street is Richard Bernstein, chief U.S. market strategist for Merrill Lynch & Co. in New York. He believes that most investors, whether they admit it or not, have high expectations for stock returns over the next few years.

That is a sure setup for disappointment, Bernstein said. "High expected returns are rarely forecasted for the asset class that ultimately outperforms," he said. Investors, he added, still haven't shaken the strongly bullish long-term view of stocks that defined the late 1990s.

That isn't how Ned Riley sees it. The chief investment strategist at State Street Global Advisors in Boston points to a dramatic shift in Wall Street analysts' recommendations since the bull market peaked in early 2000.

In January 2000, 71.2% of stock recommendations were "buy" or "strong buy," according to data firm Thomson First Call. The remaining 28.8% were either "hold" or "sell" recommendations.

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