How Stock Investors Chant 'Deee-fense!'; For Protection From Every Rumor, They
Shun Steel, Buy Cosmetics; Surprisingly, Tech Stocks Hold Up
E.S. Browning. Wall Street Journal. (Eastern edition). New York, N.Y.: May 16, 2005. pg. C.1
http://proquest.umi.com/pqdweb?did=839997391&sid=3&Fmt=3&clientId=68814&RQT=
309&VName=PQD
Abstract (Document Summary)
"The big parlor game on Wall Street these days is to guess" where the crunch will come,
says Jason Trennert, chief investment strategist at New York research and brokerage
firm International Strategy & Investment. People fear an investment bubble bursting in
China or in the U.S. housing market. They worry about a corporate disaster in the auto
or airline business. They fear a blowup at some big hedge fund, perhaps caused by a
big bet on some kind of risky corporate bond. "Generally, in the past, it has been
something no one was talking about," Mr. Trennert says.
In that kind of climate, the specific news of the day can matter less than the general fear
of looming trouble. In the past few days, the big news wasn't the strength of retail sales
or the jobs report. It was the news that credit-ratings companies were downgrading the
debt of General Motors and Ford Motor, and that some arcane derivative products
involving corporate loans were gyrating. It was a rumor, which hasn't proved true, that
huge hedge funds had gotten caught up in those market swings and had blown up.
Mr. Trennert of ISI says that often, the Fed doesn't stop raising rates until there is some
kind of painful blowup in financial markets, as happened in 1987, 1998 and 2000. "If
history is any guide, what gets the Fed to stop tightening is not any epiphany on their
part, but some kind of financial crisis," he says. Even so, he thinks further stock-index
declines could amount to no more than a 5% drop from here, after which he suspects
the Fed will stop raising rates and the market will rebound.
Full Text (989 words)
Copyright (c) 2005, Dow Jones & Company Inc. Reproduced with permission of
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FOR A LONG TIME, the stock market had a simple mantra: Buy what China buys.
With the world economy soaring, steel stocks, oil stocks, mining stocks, stocks of just
about anything that fed a booming economy, led the U.S. market.
But around the start of March, as signs cropped up of a slowing economy, the stock
market hit its high for the current bull market and things changed. Today, steel and oil
are leading the market down. The new mainstays are the stocks investors once scorned:
so-called defensive stocks such as drug makers, personal-products companies and
some food makers, whose history of relatively steady performance makes them soughtafter in times of uncertainty.
"There has been a shift going on that has picked up steam since mid- March," says
Michael Panzner, head of sales trading at Rabo Securities in New York. "The Ides of
March seem to have been the turning point."
Since the government issued a surprisingly soft jobs report on March 4, the strongest
sectors have included drug and other health-related stocks, food distributors, liquor
companies and utilities, he says. The weakest have been groups such as employment
services, car makers, steelmakers and mining companies. The government issued a
robust jobs report earlier this month, but the market's jitters have continued.
Investors have gone from marveling at the economy's strength to wringing their hands
over the risk that the Federal Reserve will raise interest rates too far, stifling growth and
causing a blowup that sends stocks into a bear market.
"The big parlor game on Wall Street these days is to guess" where the crunch will come,
says Jason Trennert, chief investment strategist at New York research and brokerage
firm International Strategy & Investment. People fear an investment bubble bursting in
China or in the U.S. housing market. They worry about a corporate disaster in the auto
or airline business. They fear a blowup at some big hedge fund, perhaps caused by a
big bet on some kind of risky corporate bond. "Generally, in the past, it has been
something no one was talking about," Mr. Trennert says.
In that kind of climate, the specific news of the day can matter less than the general fear
of looming trouble. In the past few days, the big news wasn't the strength of retail sales
or the jobs report. It was the news that credit-ratings companies were downgrading the
debt of General Motors and Ford Motor, and that some arcane derivative products
involving corporate loans were gyrating. It was a rumor, which hasn't proved true, that
huge hedge funds had gotten caught up in those market swings and had blown up.
After three straight weeks of gains, the Dow Jones Industrial Average last week declined
205.28 points, or 1.98%, to 10140.12, including a drop of 49.36 points, or 0.48%, on
Friday.
The broader result has been a clear shift in where investors were willing to put their
money.
Even during the period since April 20, when the market has rebounded after the Dow
industrials almost fell back below 10000, investors have been unwilling to shift back
toward riskier, more aggressive investments.
Utility stocks have benefited from the situation. For most of the bull market, they joined
oil, steel and transportation stocks in soaring, benefiting from rising energy prices and
rising demand for power. And they have continued to rise since March, because they are
classic defensive stocks, whose high dividends are sought-after in uncertain times.
Two exceptions to the rule have been technology and financial stocks, which suffered for
most of the year but began a rebound in April. Some investors hope the market is
beginning to anticipate an end to Fed rate increases. An end to rate increases would
help stimulate business investment in things like tech gear. It would help financial
companies, whose costs go up faster than their income when rates are rising. Because
financial stocks are the biggest group in the S&P 500, representing more than 20% of
the index, their fortunes have a big impact on the index's performance.
"We are through the soft spot. It is beginning to turn around this month," says Jeffrey
Kleintop, chief investment strategist at PNC Advisors, the investment advisory unit of
PNC Bank in Pittsburgh.
But other economically sensitive stocks continue to languish. Some analysts fear that
the rebound in financial and tech stocks is little more than a bargaining-hunting bounce.
Mr. Trennert of ISI says that often, the Fed doesn't stop raising rates until there is some
kind of painful blowup in financial markets, as happened in 1987, 1998 and 2000. "If
history is any guide, what gets the Fed to stop tightening is not any epiphany on their
part, but some kind of financial crisis," he says. Even so, he thinks further stock-index
declines could amount to no more than a 5% drop from here, after which he suspects
the Fed will stop raising rates and the market will rebound.
Increasingly, investors are waiting for some sign from the Fed before they start betting
heavily again on cyclical stocks.
Robert Morris, chief investment officer at Jersey City, N.J., fund- management group
Lord Abbett, says he thinks interest-rate increases will be mild enough that they won't kill
the economic recovery, and that the S&P 500 will bottom out some time in the summer
or fall, rising as much as 15% between now and the end of the year.
Until then, however, "it looks like people have thrown in the towel on all things cyclical
and are running for cover," he says.
--Friday's Market Activity
The Standard & Poor's 500-stock index finished down 5.31, or 0.46%, at 1154.05. The
Nasdaq Composite Index rose 12.9, or 0.66%, to 1976.78.
The financial sector suffered after analysts at Smith Barney lowered their second-quarter
earnings estimates for several brokerage firms. Shares of J.P. Morgan were off 1.1%.
A stronger dollar weighed on Alcoa, which fell 3.1%, and Exxon Mobil, which slipped 2%.