| BUSINESSWEEK ONLINE : NOVEMBER 15, 1999 ISSUE | ||||||||
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| FINANCE
More Treats Than Tricks on Wall Street Strong profits push aside Y2K and interest-rate fears This year, the October scare wasn't as much about goblins and ghouls as it was about interest-rate worries and Y2K jitters. But as we move into a new month, the scare may be over as fast as the word ''boo!'' can be uttered. Inflation fears have largely abated and Year 2000 issues continue to be of little concern, say strategists. Moreover, a new star is taking center stage: exceedingly strong corporate profits. Still, there are some worrisome market fundamentals, like breadth and volatility, and these will likely keep stocks from staging a sharp upswing before the year's end. In fact, the Dow Jones industrial average isn't likely to break through its August high of 11,326. ''Investors have turned their attention to the fantastic third-quarter earnings. These have drummed out interest-rate fears,'' says Thomas M. Galvin, chief investment officer at Donaldson, Lufkin & Jenrette Inc. With 84% of companies reporting so far, third-quarter corporate profits are up 22% over last year, according to I/B/E/S, the earnings research firm. The quarter's growth rate is the strongest on record after the second quarter of 1995. And it is the second lowest quarter ever in terms of negative surprises. ''You can say there are easy comparisons over last year because of the Asian crisis. Still, there's no question that earnings are strong. No matter how you look at it, this is real stuff,'' says Galvin. Corporate profits also look healthy going forward with fourth-quarter estimates 19% over last year. But sharp volatility coupled with a narrow market mean that companies that post earnings surprises--in particular negative surprises--are moving the market dramatically. In fact, after an earnings disappointment, stocks are declining twice as much this year on average than last year. And big-cap stocks, after posting upside surprises, are moving the market more than in previous years, according to MarketHistory.com, a financial markets research firm. Two big winners that spurred the market to spectacular heights in recent weeks: Microsoft Corp. and Citigroup. Microsoft released earnings on Oct. 19 that were 4 cents over estimates; the S&P 500 rose 2.2% on that news alone. The S&P 500 Financial Index has jumped 16% since Oct. 18, when Citigroup announced earnings that were 2 cents over estimates. But when IBM's earnings came in lower than expected on Oct. 20, IBM plunged 17%, and the market did a reverse rally, with the Dow falling 95 points. 'DOING IT ALL.' Overall, the market has been on an upswing, largely led by tech stocks. The Nasdaq hit its third consecutive record high this week and the Dow gained 700 points in the previous two weeks. The strong earnings, coupled with fleeting interest-rate concerns, have spurred the market upward. Indeed, even if the Federal Reserve does raise rates on Nov. 16, the increase has already been priced into the market. ''The consensus is that the Fed is doing all it can to keep inflation intact and that it's not getting out of hand,'' says Edward Keon, chief quantitative strategist at Prudential Securities Inc. ''You've already got a substantial inflation risk premium built into fixed-income and equities.'' But unsettling market factors remain. The first is volatility. This year, the Dow has moved more than 4% in either direction during a calendar week six times. On this measure, this is the second most volatile year of the past 25 years, second only to 1987, according to MarketHistory.com. ''It's a little head-spinning for a lot of participants,'' says Charles Crane, chief investment strategist at Key Asset Management. Then there's the narrow market breadth--meaning the market's overall gain hinges on only a handful of stocks. While the Standard & Poor's 500-stock index is down 5% from its year high, the average S&P stock is off 23%. And though the Nasdaq composite is at a record, the average Nasdaq stock is down 35% from its high. All this means the market may move up some before the year's end, but not much, with a Dow 11,000 a reasonable target. That's certainly nothing to get scared about. By Marcia Vickers in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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