While more investors are upbeat, others detect short-term rebound
BY E.S. BROWNING
In 1960, Gerry Goffin and Carole King wrote "Will You Love Me Tomorrow" with the classic lyric: "Is this a lasting treasure, or just a moment's pleasure?"
That's what investors want to know about the recent stock rally.
After a rough start to the year, the Dow Jones Industrial Average has surged close to 11% since March 10. It is down just 8.3% from October's record, a lot stronger than many expected.
People like Eric Bjorgen of Leuthold Group, a money-management and research firm in Minneapolis, are wondering whether this rally is something they can invest in for the medium term or just a bearmarket bounce that will soon fade.
To figure that out, Mr. Bjorgen looked at 10 past stock recoveries. He wanted to know what kinds of stocks usually are strong when the market recovers from serious trouble, and whether those groups are leading today. He discovered some anomalies.
Over the past 60 years, market leaders at the start of lasting recoveries often were stocks tied to consumer spending: hotels, resorts, cruise lines, general-merchandise stores, banks, home builders. Investors were betting on a rebound in consumer spending.
This time, only a handful of those groups are leaders, including consumer-finance companies, homefurnishing stores and Internet retailers. More of the leaders are heavy-industry groups that usually rally late in bull markets, notably those tied to coal, steel, fertilizer, oil andindustrial gases.
Mr. Bjorgen says he fears that investors are looking backward. They are showing confidence in the areas that were strong late in the past bull market because of the robust global economy. They aren't showing confidence in the consumer stocks that typically would lead a sustained new rally, given that consumer spending represents the great majority of U.S. economic activity.
"This kind of work suggests that it is not a bull market, but really a bear-market rally," Mr. Bjorgen says.
He cautions it is too soon to make sweeping conclusions. The market has rebounded for only two months, and studies of past leadership measured gains over longer periods. But while it waits for stronger indications, Leuthold Group is keeping its investments in a neutral position, with about 50% net exposure to stocks and the rest in bonds and cash.
A growing number of other investors are more upbeat, which helps explain the market's recent strength. People who had held money on the sidelines are jumping back into stocks, for fear of being left behind. A broad view has emerged that, while there will be ups and downs, broad indexes aren't likely to fall much below the March 10 lows.
Hopes are spreading among economists, too, encouraged by retail sales that weren't as bad as expected and by economic-growth and employment numbers suggesting that the economy might be avoiding recession.
But there also are doubters here, and they focus on the same area as Mr. Bjorgen: the consumer.
The most widespread view, says economist Zach Pandl at Lehman Brothers, is that this spring's U.S. tax rebates will keep the economy out of recession long enough for the positive effects of Federal Reserve stimulus to kick in, permitting a longer-term economic recovery.
Lehman, however, sees the economy slumping again later this year as consumers finally run out of steam.
So far, consumers have been more resilient than expected, and Mr. Pandl notes that in recent years, it has always been an error to predict the American consumer's demise. Still, he points to Fed data suggesting that consumers are sustaining their spending by shifting more debt to credit cards because new mortgages and home-equity loans have become hard to get. He believes there is a limit to how long consumers can put off the day of reckoning.
"Ultimately, there is only so much you can borrow" on credit cards, he says.
Even more worrisome, data on foreclosures already in progress and on mortgage delinquencies indicate there will be 1.5 million home foreclosures in the U.S. this year, up from 200,000 in a normal year, he says. Unemployment still is only 5%, well below the 6.3% to which Lehman sees it rising as companies carry out cost-cutting plans. That suggests times will get tougher for consumers later this year.
Mr. Pandl and his Lehman colleagues believe that slumping consumers will send the economy into a double dip, with a tax-rebate-fueled recovery this summer and a sag starting later this year and running well into 2009.
Goldman Sachs also worries about an economic double dip, for many of the same reasons. While Goldman thinks the economy may escape actual recession on the second dip, it worries that the stockmarket will suffer. "Mere are a number of risks to the stock market late in the year," including a softening economy, excessive optimism about corporate profits and rising unemployment, says Goldman economist Andrew Tilton.
This uncertainty is one reason the stock market has been tentative in recent weeks, surging one day and slumping the next.
Some analysts also point out that the period from May through September historically is weak for stocks, especially during hotly contested presidential-electionyearsone more reason to worry.
That said, the month of May so far has hardly been a problem. Last week, the Dow industrials rose 1.9%. Anyone who has been out of the stock market since March has missed a gain of more than 10%.
Some investment firms have responded by boosting their stock holdings cautiously so that they can pullback or jump in more heavily depending on events. Leuthold Group increased its stock allocation back in January, after keeping it as low as 30%. Whether this is a lasting rally or just a moment's pleasure, Leuthold wants to enjoy at least part of it. It is keeping an eye out for signs either that the economy is stronger than it thinks or that the rally has run its course, so that the firm can shift strategy quickly.
"If you are going to play it, you have to be ready to get bullish or bearish in a hurry," Mr. Bjorgen says.
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