Investors Take Sunny View Of Gloomy U.S. Jobs Data By E.S. BROWNING Staff Reporter of THE WALL STREET JOURNAL
The economic indicators are gloomily heading south. The stock market is cheerfully heading north. What gives?
Economic hopes took a hit Friday, when investors learned that April unemployment, at 4.5%, was far higher than expected. Wages also were up more than expected, sparking worries on inflation. On top of that, President Bush's spokesman said the White House feared that strong first-quarter growth numbers, which had helped to boost stocks, might have to be revised downward.
It sounded like the economy might be heading down again, and stocks initially fell Friday morning. But then, curiously, the market turned around and stocks put in a substantial gain.
Some attributed it to a renewal of the old bull-market mentality. Hopes spread that the Federal Reserve now will stimulate the economy further by cutting rates by yet another half-percentage point when it holds its next policy meeting a week from Tuesday.
But it is possible that an even simpler explanation is behind some of the buying: Over the past month, a lot of investors have begun to bet that the economy isn't going to get much worse and may well entirely avoid a recession, defined as two consecutive quarters of economic decline. Given all of the job cuts announced in April, the reasoning goes, an uptick in unemployment isn't a bad surprise at all. It is a sign that companies are taking their medicine and that the economy is hitting bottom.
There are plenty of experts who think that is fool's logic, that recession could be around the corner and that the market is headed down again. But that skeptical view is in the clear minority now. Expectations for technology stocks had fallen so low that the mere idea that the economy could be reaching bottom has been enough to give them a serious boost and help pull the entire market back up.
"I think that even a 5% unemployment number is not so steep as to really affect the broad economy," says Tim Morris, chief investment officer at Bessemer Trust in New York. "In a way, this is positive news because this is what companies had to do to get a handle on their earnings and margins. They had to attack the labor component of their cost structure."
That helps explain why the tech group has been surging. On Friday, despite the negative economic news, the tech-led Nasdaq Composite Index jumped 2.11%, or 45.33 points, to 2191.53. It was up 5.6% for the week and ahead 34% since April 4. The Dow Jones Industrial Average advanced 1.43%, or 154.59 points, on Friday, to 10951.24, up 1.3% for the week and up 15% since March 22.
For the year so far, the industrials now are up 1.5%, but the beleaguered Nasdaq still is down 11%. The broad S&P 500, which gained 1.44%, or 18.03 points, to 1266.61 on Friday, still is down 4.1% so far this year and is 17% off its record close of March 24, 2000.
It isn't that investors such as Mr. Morris have turned totally bullish. Mr. Morris has boosted his tech holdings to 18% from 12% of his portfolio, a 50% increase in a month. But his exposure to tech and communications stocks still is below that of the Standard & Poor's 500-stock index, which is around 26%. He had sold so much tech stock that all he had to do was turn somewhat less pessimistic in order to spark a sharp jump, in percentage terms, in his exposure.
George Cohen, president of New York money-management firm Cohen Klingenstein & Marks, made a similar argument in a report to clients last week. "It is our view that the economy is very close to the weakest point in the current slowdown, probably we are past it," Mr. Cohen wrote. His firm sold a lot of its tech holdings more than a year ago and shunned them until a few weeks ago. Now, he told his clients, "the quality technology companies that have defined markets and huge profits have had their stock prices overcorrected. It is time to move back into them."
There are plenty of people who are less hopeful about the economic data.
Bob Bissell, president of Wells Capital Management, Wells Fargo's money-management arm, agrees that, in all probability, "we are past the worst" in the economy, although he, too, says he wouldn't be surprised to see unemployment go to 5% before companies finish downsizing.
But he disagrees with Mr. Cohen on an important point: He doesn't see how technology companies can turn in business results to justify their huge recent stock gains. Juniper Networks has more than doubled since April 4. Intel is up 36% and Nokia is up more than 50% since then. What are they going to do now to justify further gains?
Even the best of the economic numbers still look weak, Mr. Bissell notes. Strong auto sales helped spark first-quarter growth, but many of those sales were made at little or no profit. He thinks the economy will remain weak and bonds may do better than stocks as the Fed keeps cutting interest rates in an effort to stave off recession.
"We think some major sectors of the economy will still go sideways for a while, including technology," he says. "Companies aren't investing a lot of money in new technology initiatives. They still are in a wait-and-see mode."
Asked whether the U.S. economy is headed into a recession, Lawrence Lindsey, President Bush's chief economic adviser, told the Society of American Business Editors and Writers last week, "I don't know." He added that "the high-tech sector is clearly having problems."
Some economists are convinced that recession is around the corner. "Do not underestimate the potential for conditions to become dramatically worse overnight," warned David Levy, director of the Levy Institute Forecasting Center in Mount Kisco, N.Y., in a report last week. Layoffs and cuts in household spending could produce a recession just as many people think the danger is past, he said, especially if foreign economies continue weakening. Stocks would be hammered.
He is among the bears of his profession, and he could be wrong. But last year, many people wrongly ignored his warning that the Nasdaq stocks were vastly overpriced and due for a crunch.
Some economists also worry that the higher-than-expected wage gains in April could spark inflation, preventing the Fed from cutting rates as much as it wants.
But most investors are shrugging off such concerns. They seem more inclined to look ahead to the fact that the likely Fed rate cut next week will be the fifth this year, one of the sharpest Fed stimulative moves ever. Almost never have stocks failed to rebound after five rate cuts, the bulls point out.
The latest mutual-fund data suggest ordinary people are moving money out of money-market accounts and back into stock funds, says Credit Suisse First Boston investment strategist Thomas Galvin.
Adds Arnold Berman, chief investment strategist at brokerage firm Wit SoundView, in a report to clients: "After a long spell in which technology fundamentals were downright horrible, they now have become merely miserable. The news is no longer all bad, just mostly bad."
That, he said, means tech stocks can stage a rebound, but probably not another moon shot. Rather than "choosing stocks based on 'the next really hot concept,' " he said, investors will do better this time with "good bottom-up stock picking" based on valuation, not business themes.