Stocks rise on positive news

Investor confidence, Lowe's earnings report fuel gains in indexes

`A great recipe for success'

But leading indicators fell in July, raising fears of possible slowdown

August 20, 2002|By William Patalon III | William Patalon III,SUN STAFF

Stocks soared again yesterday, building on four weeks of gains, thanks to strong earnings reports from a key retailer and increased investor confidence that the U.S. economy is rebounding and corporate accounting scandals are a thing of the past.

"You've got a decent economy, low interest rates, no inflation, a neutral Fed and [a belief that] most corporations are showing legitimate earnings growth through the end of this year," said David L. Berman, head of Berman Financial Group LLC in Timonium. "You add all this up ... and it's a great recipe for success."

The Dow Jones industrial average jumped 212.73 points, or 2.42 percent, to close at 8,890.79, with 28 out of 30 stocks in that blue-chip index showing gains. The technology-laden Nasdaq composite index rose 33.53 points, or 2.47 percent, to close at 1,394.54.

Advances in financial-services and retailing shares helped the Standard & Poor's 500 index climb 21.93 points, or 2.36 percent, to finish at 950.70. All 10 of the index's industry groups advanced.

With yesterday's gains, the broad S&P index has rallied 19 percent from its five-year low of 797.70, set July 23. Retailing shares have helped fuel that rally: Last week, for instance, such companies as Target Corp. and Nordstrom Inc. reported earnings that beat analyst estimates.

Yesterday, the contributor was Lowe's Cos. Inc. The home-improvement retailer reported its earnings for the second quarter rose a greater-than-expected 42 percent and predicted that profit in the fiscal year that ends in January will also exceed Wall Street's forecasts. Lowe's shares jumped $4.21 each -- their biggest gain in 16 months -- to close at $41.

The upbeat reports from retailers bolstered investor confidence that consumers are continuing to spend. That's crucial because consumer spending accounts for 70 percent of the nation's economic output and because businesses have been loath to spend with their profits down and share prices crimped.

"The consumer is going to plug along," said James Awad, who manages $900 million as chairman of Awad Investment Management.

Increase in debt

But other analysts questioned whether consumers can continue to spend as they have. In contrast to other downturns, in which consumer debt declined, consumer debt has risen from 72 percent of gross domestic product at the height of the bull market to 79 percent now, according to recent reports. A continued escalation of debt could ultimately force consumers to slow their spending, translating into a downturn in the economy, analysts said.

The latest economic report points to a possible slowdown: The Conference Board said yesterday that its index of leading economic indicators -- designed to forecast economic activity three to six months down the road -- fell 0.4 percent in July, its largest decline in 10 months. That was less than the consensus estimate of 0.5 percent among economists but still hints at a drop in economic activity.

On the positive side of the ledger, analysts are projecting that corporate earnings will rise 11.5 percent during this quarter and 23.2 percent in the fourth quarter, according to Thomson First Call, an earnings-information firm. Profit growth of that magnitude should translate into a continued rise in share prices, experts say.

Confidence still key

Either way, investor confidence will be the key. Rising corporate profits and stock prices would continue to fuel confidence, which in turn should further boost profits and stock market advances. But bad news, in the form of additional accounting scandals or "incidents" such as acts of terrorism or even a U.S. attack on Iraq, could scuttle investor confidence, which would likely sink corporate profits and stock prices, experts said.

"You have to look at the [stock] market as a glass," said Angel Mata, senior vice president in charge of listed trading for Legg Mason Inc. in Baltimore. "Right now, the glass is half-full, barring any incidents. But it's half-empty if any incidents develop."

`Relief rally' continues

According to Mata, the stock market has dodged one potential land mine, with no new scandals arising from last week's deadline for U.S. companies to certify their financial statements. A "relief rally" sent the Dow up more than 260 points Wednesday, the day of that deadline, and has bolstered investor confidence enough to fuel the rally that continued yesterday, Mata said.

For this rally to turn into a sustained advance, companies are going to have to deliver earnings increases, he said. That especially holds true for high-tech firms, whose share prices have suffered more than any other sector in this downturn.

"This is still a `show-me' market," Mata said.

With the recent gains stocks have seen -- along with so many lingering worries about the nation's economy -- share prices may not have much more room to run, some experts cautioned.

"You have to ask yourself: Where can they go from here?" said Robert Mewshaw, head of Van Sant and Mewshaw, a money-management firm in Lutherville. "Do you want to be on board [in view of] the kinds of risks you face?"

Bloomberg News contributed to this article.

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