Is the rally real?
Wall Street's party may run out of steam unless the economy shows up for the celebration
History lesson. Another encouraging aspect to this rally is that it has been deep as well as broad--and not reliant on a handful of powerhouse stocks to pull the indexes higher. The number of stocks advancing has outweighed the number of decliners in this rally by 2 to 1, which market strategists view as positive. The rally also has history on its side. The S&P 500--down in 2000, 2001, and 2002--hasn't declined four years in a row since 1932. Then there's the presidential election cycle. Since the end of World War II, the S&P 500 has never experienced a decline in the third year of a presidential term, such as we're in now.
Of course, it would be nice to have better company fundamentals supporting the market. But there have been signs of improvement. In the first quarter, corporate America beat Wall Street analyst expectations by 6.5 percent. No quarter has come close to that during the past three years. While Wall Street is expecting around 6 percent earnings growth for the second quarter, some observers such as brokerage Morgan Stanley think profits could grow at an 8 percent to 10 percent clip. And while that is way off beginning-of-the-year projections (which usually turn out to be too rosy), it's not too shabby in this disinflationary environment. A similar pattern of weak economic reports existed back in the "jobless recovery" of the early '90s, as the market began its decade-long rise. Yet many individual investors continue to play it safe. Cash as a proportion of financial assets jumped to 17.5 percent in the first quarter vs. 11.7 percent in early 2000. And a survey of gen-X investors by New York Life Insurance Management found that only 47 percent now think stocks are an important part of a person's investment portfolio. "In the '90s, the public got sucked into that vortex of speculation where they thought that `this time is different' and that we would never have another recession," State Street's Riley says. "Now they are doing the exact opposite and extrapolating the negative."
But when that love affair with stocks does finally rekindle, there will be no shortage of fuel to light the fire, as nearly $1 trillion is sitting in money market funds that could shift into stocks. (We may be seeing the first hints of that in the 20 percent rise in daily trading volume that Charles Schwab reported for May.)
When exactly might that happen? Probably when there is more concrete evidence of increased production and employment. Zempel thinks that could start showing up in the third quarter, which, by the way, is traditionally a weak one for stocks. But if the economy does come through eventually, then investors might finally have the long-awaited sequel to the bull market of the roaring '90s.
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