Markets & Finance

Trees Still Don't Grow to the Sky


By Joseph Lisanti Is the rapid run-up in share prices since mid-March a normal response to improving conditions or a new example of what Alan Greenspan once called "irrational exuberance"? Much as it may be comforting to choose one or the other, the truth is it appears be a little of both.

We remain firmly in the camp that sees the market advance as a logical, necessary reversal of the painful decline investors have suffered through since early 2000. Despite some weak spots, the economy is improving and corporate earnings are recovering. Technically, the market's internal condition has shifted from neutral to bullish.

Nonetheless, it has become clear that some stock buyers already have forgotten the lessons of the long bear market. We find surging prices for stocks that have no profits and no immediate prospects of earnings a bit troubling.

While a case can be made that the stronger economy will mean better profits for many companies, it is impossible to argue that some biotech firms, years away from launching yet unproven products, will be aided by fourth-quarter economic growth. Yet many such stocks have outpaced the market in recent weeks, largely on the basis of positive preliminary studies. We stress the word preliminary, since many of these promising compounds ultimately will prove to be ineffectual.

Likewise, consider companies that make commodity memory chips. Prices continue to fall and industry capacity is sufficient to ensure that they won't be rising anytime soon. Yet the stocks of these companies have had an impressive run lately.

Some of this speculation could be tied to efforts by institutional investors to be seen holding winning stocks at the end of the second quarter. If so, this portfolio "window dressing" could unwind in early July as stocks bought simply for an appearance in the quarter-end snapshot are sold.

We believe that the S&P 500 will work its way higher, but some backing and filling should be expected. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook


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