Bears perk up after market's January swoon

Bulls remain hopeful, but trim predictions

Dow down 3.5% since Dec. 31

First month often indicates direction for rest of year

February 02, 2003|By Paul Adams | Paul Adams,SUN STAFF

If January is any indication of what lies ahead for the stock market, 2003 may be another exasperating year for investors who have seen their portfolios dwindle for three years straight.

Blame it on corporate scandals, looming war with Iraq, a sluggish economy, tanking consumer confidence, weak corporate spending, the falling dollar, rising oil prices or just about any economic indicator making headlines recently. The bottom line is that investors are increasingly discovering that they are alone in a wilderness of uncertainty.

The usual guides have too often been proven wrong in recent years, but bull and bear alike seem to agree that stock prices are likely to remain choppy for months - even years - to come. The optimistic analysts who were forecasting a rise of 20 percent to 30 percent in 2003 have tempered their enthusiasm after a month that saw the Dow go from 8,842.62 on Jan. 14 to 7,945.13 on Thursday. The blue-chip average bounced back 108.68 points on Friday, but still ended the month down 3.5 percent.

With the market still unsettled, many are now predicting more modest gains of 5 percent to 10 percent, while others are convinced the market remains overvalued and has yet to reach bottom as a result of continued economic weakness.

"We're in a climate of uncertainty that is, quite candidly, as difficult to divine as any of us have ever experienced," said Alan Ackerman, executive vice president and market strategist for Fahnestock & Co. in New York.

Things were bad enough on Sept. 10, 2001, when Ackerman appeared on Lou Dobbs Moneyline and described whipsawed investors as belonging to three camps: the bulls, the bears and the bewildered. The next day, he found himself on top of a CNN building trying to help the cable news channel's viewers make sense of the terrorist attacks. Like a lot of market experts, he's still figuring it all out.

It's a difficult time to be in the forecasting business. Consider last week: The Dow Jones industrial average tumbled 141.45 points Monday, taking the index below 8,000 for the first time in three months and putting it nearly 10 percent below its January peak. The decline followed a 238-point fall on the previous Friday, which marked the fourth triple-digit loss in five days.

By Tuesday, bargain hunters were out in force, pushing the Dow up nearly 100 points on positive corporate earnings news. But on Wednesday, the index shed 143.84 points in the morning after President Bush's tough talk on Iraq, only to bounce back into positive territory in the afternoon as positive earnings reports and favorable comments by the Federal Reserve Board boosted investor confidence.

Just another roller-coaster week on Wall Street, with no relief in sight.

"In view of current circumstances, this is not a time for individuals to be making big bets on the market," Ackerman said. "We're in an environment where treading water is probably the best bet with a tilt toward a defensive portfolio."

`January barometer'

Those urging caution may have history on their side. The market's performance in January has typically set the tone for the rest of the year. Proponents of the so-called "January barometer" note that if the Standard & Poor's 500 index is down in the first month, it usually ends down for the year. That index ended January at 855.70, down 2.7 percent for the month.

The barometer is especially accurate in odd years, when new Congresses convene, said Jeffrey Hirsch, who publishes the Stock Trader's Almanac. In those years, the January barometer has been accurate in every year since 1937, except one. That was in 2001, when Fed rate cuts sent the market up in January, only to have it come crashing down after the Sept. 11 terrorist attacks.

The war factor

"Most of the time, war comes up when you hear of it [the January barometer] being off," Hirsch said, recalling a few off years during the Vietnam War.

Many market pundits have sought to blame Iraq war worries for the recent price volatility.

The last time the United States battled Saddam Hussein, the market didn't rally until after the bombing started and investors became confident that the conflict would be resolved quickly.

But academic experts and market historians say volatility is normal in a bear market - war or no war. And analysts say war anxiety is only one of many factors weighing down the market in recent weeks.

For starters, investors are still dealing with the aftershocks of last year's corporate ethics scandals that enveloped companies such as Houston-based Enron and telecommunications giant Global Crossing Ltd.

The economy

At the same time, the economy's modest recovery has failed to produce more jobs, pushing unemployment up to 6 percent and leaving many small investors anxious about their financial security.

The phenomenon is reflected in flagging consumer confidence and weak retail sales over the holidays. Consumer spending accounts for about two-thirds of the economy.

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