Some say Wall Street is a crooked thoroughfare that begins at a churning river and ends in an old graveyard. It's a fitting metaphor for 2002--the third year of a grisly bear market. There hasn't been a time in recent memory when the stock market has been so violently roiled, destroying the fortunes of so many. Nor has Corporate America ever been shaken by such an array of scandals. Words like Enron, WorldCom, Adelphia, ImClone, Grubman, Kozlowski, and Fastow have entered the vocabulary as shorthand for corruption and greed. Even Martha Stewart--the Queen of Clean--got her hands dirty in an insider-trading scandal. Things got so bad that Wall Street became a running joke on late-night talk shows. As Jay Leno said: "Do you know the difference between Las Vegas and Wall Street? In Vegas, after you lose your money, you still get free drinks."
The good news is that 2003 looks a few shades brighter.
After the market's 40% tumble over the past three years--more than half of that in 2002--many strategists expect stocks to be up in the mid-to-high single digits. "This is the kind of market where people are looking to hit a solid single, not a home run," says Charles Pradilla, chief strategist at SG Cowen Securities Corp. That may soothe investors who have lost almost half of their money in the past three years. But it won't be an easy market. Terms like "seesaw" and "meandering" pepper many strategists' 2003 forecasts. "We're still in a bear-market recovery," says Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray. "What the market needs to do, and what it will probably do, is end up in a big trading range next year." He thinks the market will stage several double-digit swings, making it "a very good year for active managers and stockpickers."
QUALITY IN THE BARGAIN BIN More than ever, it's crucial to choose quality stocks. Investors need to find good, solid companies that have been beaten down mostly because of market conditions or sector scares, rather than deep-seated problems or scandals. A number of value as well as growth stocks fit that bill. Some promising 2003 picks: Wells Fargo (WFC ), Cisco (CSCO ), DuPont (DD ), and Network Associates (NET ). As legendary investor Warren E. Buffett once said: "Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price."
Happily for investors, tough times in the markets have put plenty of good companies in the bargain bin. "There is a lot to be said for a bear market," says James Grant, founder and editor of Grant's Interest Rate Observer has said. "It clears away the debris of our preceding boom. It puts `paid' to a lot of mistakes, and it gives people a chance to buy great companies cheap." Still, investors may need to be patient. It could take one, two, or even three years for some stocks to pay off.
That doesn't mean the market won't pick up sooner. A "Triple Crown bear market"--three straight years of falling prices--has occurred only three times since 1900, according to MarketHistory.com. In two instances, the Dow Jones industrial average rallied the following year--rising 43% in 1904 and 8% in 1942. Only during the Great Depression did the bear market stagger on for a fourth year before gaining a rip-roaring 64% in 1932.
Already, stocks have staged an impressive rally. Since Oct. 9, the Standard & Poor's 500-stock index gained 15%, the NASDAQ Composite Index 22%, and the Dow 16%. What caused the upsurge? Accounting scandals seem to have abated. Wall Street investment banks may settle with regulators over conflicted analysts' research and initial public offering allocations. The White House is promising to give the sagging economy a shot in the arm with tax cuts.
What's more, stocks are again becoming the "asset class of choice," according to Richard Bernstein, Merrill Lynch & Co.'s chief U.S. strategist. Real estate price rises seem to be flagging, and bonds could easily take a bath if the Federal Reserve raises interest rates from their 40-year lows. Some strategists say that a one percentage point rise, from 1.25%, is already priced into the market. And further hikes could follow. But even when rates rise, stocks can perform well. The market has climbed 56 out of the 87 years since 1915. During most of them, rates were rising, too. But stocks were driven higher by rebounding earnings.
Copyright 2002, Bloomberg L.P.
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