Ornery market can try rising

Three painful years enough, the pros say

Stocks

January 12, 2003|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

The last time the stock market turned in four straight years of negative returns was during the Great Depression, and market experts don't expect this year to tie that streak.

Many anticipate a modest rally in the market this year as business spending picks up, corporate earnings improve, Congress cuts taxes further and investors slowly regain confidence.

"The law of averages is it will be up," said Joseph Cirelli, a financial consultant with Smith Barney in Baltimore. "You should expect volatility with more moderate returns."

The stock market has just finished its third consecutive year of negative returns, a performance not seen since 1939 to 1941. While the market may gain ground this year, it won't be doing so by the 20-percent-plus leaps and bounds reminiscent of the late 1990s, many experts said.

Many predict the Dow Jones industrial average, made up of 30 blue-chip stocks, will finish this year 8 percent to 10 percent higher. The broader Standard & Poor's 500 index is expected to rise by 6 percent to 10 percent. The technology-heavy Nasdaq composite index, the hardest hit in the downturn, could go up by 9 percent to 15 percent.

Daniel T. McHugh, president of Lombard Securities in Baltimore, is more bullish than most, anticipating that the Dow and S&P indexes will go up more than 20 percent this year.

"I have been a big bull since about midway through the summer," he said. "I haven't seen valuations like this since the mid-1970s."

The Sun-Bloomberg index of the top Maryland stocks also lost ground three years in a row. The state's economy is stronger than other areas of the country, which will give Maryland companies an advantage this year, experts said.

"Maryland stocks will outperform the national average, especially in health care, technology and biotech," said Bruce Alderman, president of Chapin, Davis in Baltimore.

While some market watchers predict that this will be the first of several years of gains, others are less optimistic.

"Don't assume we're starting a new bull market. We have seen the lows, but we're not looking at any kind of powerful, multi-year rise in stock prices," said Richard Cripps, chief market strategist for Legg Mason Inc. in Baltimore.

"We could have one year up 10 percent, the next year down 1 percent, and the next year up 5 percent."

And even some bulls warn there's a slim chance that events can stop this year's rebound.

"A lot of things can go wrong, or stay wrong," said John Boo, director of Nasdaq trading for Ferris, Baker Watts Inc. in Baltimore.

More terrorist attacks on U.S. soil, a protracted war with Iraq with high casualties and another recession could lead to a fourth year of negative returns, experts said. The last time that happened was 1929-1932.

More factors favor a market rally than a downturn, many experts said.

Inflation will likely remain in check, and the economy is expected to continue improving, experts said.

After cutting costs and writing off bad investments, companies seem poised to report higher profits this year, Boo said.

Businesses, which have held back on spending and left consumers to prop up the ailing economy, will likely increase their spending throughout the year as the economy and earnings improve, experts said.

The market should get a boost from a reduction or elimination of tax paid on dividend income, a proposal supported in Congress, experts said.

And individual investors will likely be persuaded by the low returns on bonds and other conservative investments to return to the stock market, which traditionally produces the highest returns over the long haul, said Robert W. Smith, portfolio manager with T. Rowe Price Growth Stock Fund in Baltimore.

But, he added, it will take time for investors to regain the confidence they once had in the market, before the eruption of corporate accounting scandals.

"The trust has been broken. They will have to rebuild it," Smith said. "I don't think it's a one-year thing. You gain credibility slowly, and lose it quickly."

Even if the professionals are right and the market recovers this year, it may be a queasy ride up. Swings of 20 percent to 30 percent are likely to occur during the year, said Patrick Buttarazzi, a vice president with Prudential Securities in Baltimore.

"The investor has to be ready to move and be more active, accumulating at times, to wealth-preservation mode at times," Buttarazzi said. "It's harder. It certainly requires more skill than the '90s, where literally you could throw a dart and make money."

Where will investors make money this year?

Price's Smith anticipates that the market rally will be spread among many sectors, although only the very best companies in each sector can expect to see their shares rise.

Many say investors' best bets will be dividend-paying stocks because of the prospect of a tax cut.

Buttarazzi favors telephone utilities because they pay healthy dividends and "they've been beaten down." Cripps likes electric utilities, consumers staples and financial services stocks that pay attractive dividends.

Smith Barney likes consumer discretionary stocks, including lodging and discount retailers.

"Everybody on Wall Street is looking for when consumers are going to be tapped out," Cirelli said. But Smith Barney's strategists figure that consumer spending will continue provided there isn't an energy shock that pushes energy bills up drastically, he said.

Stocks of industrial, technology and telecommunications companies should benefit from businesses updating their equipment, experts said.

Health care stocks stand to gain from an aging population and a Republican Congress that likely won't shake up the industry with major legislation, said Douglas Ober, chairman of Adams Express Co. in Baltimore.

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