Stock Market News for November 2003

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After a dramatic run-up that included a 537-point surge in the Dow during the first two weeks of October, the market turned sour in the third week, despite a relatively strong batch of third-quarter earnings. By the time the markets closed on Friday October 24th, after the busiest week of the third-quarter earnings season, investor sentiment headed south and losses for the week ranged from 1 percent for the S&P 500, to 1.4 percent for the Dow and 2.5 percent for Nasdaq. Many analysts believe that third-quarter results—most in line with, or better than predictions—were not strong enough to sustain the seven-month run-up in stock prices that began in March. They believe shareholders turned wary because some companies failed to meet lofty earnings expectations—projections that many Wall Street experts considered to be overblown and unrealistic. Discouraging third-quarter results from health care and tech industry leaders like pharmaceutical giants Merck and Schering-Plough and from Microsoft and Amazon fueled the slide despite solid performance in other sectors—notably home builders and consumer lenders.

And so, is the October sell-off a rational correction after a seven-month rally –a measured response to the market getting a little over-heated-- as some suggest? Or is the bull market running out of steam?

Wall Street commentators believe there were several factors to consider. Here are some key considerations to ponder:

  1. Some analysts believe that investors have taken their money off the table, feeling let down after a month of bidding up stocks in anticipation of a stellar third quarter. Investors fear that good news on earnings has already been factored into current stock prices, and they see little chance for significant upside potential—or future appreciation. Investors who are wondering how much higher stocks can go, and if the bull market is spluttering out of steam, might be interested to know that the median bull market lasts a little more than 2.5 years, and that at one year, the 2002-2003 bull market is well below the historical median.

  2. Historically, October is a “scary” month for investors–four of the Dow’s largest 1-day declines occurred during this month. Many investors approach this time of the year with certain trepidation.

  3. Wall Street pundits believe there’s another fear spooking investors, too. They attribute investor jitters to the wariness that is triggered every time the Dow approaches the 10,000 milestone. They note that every time the Dow has hit the 10,000 mark, it has come tumbling down shortly thereafter—to the tune of 17 times since first reaching this historical highpoint in 1999.

What’s Ahead

Many analysts remain upbeat, noting that it is not unusual for the market to pause and re-adjust after a strong surge. Many believe the markets are becoming more rational after a short period when the market got ahead of itself. Others note that good news and recent high expectations set investors up for disappointments and the market for a fall. Ironically, the recently reported indications that economic growth is cooling down—the Conference Board’s Index of Leading Economic Indicators fell for the first time in four months by 0.2 percent in September—as a welcome return to less heady optimism. Proponents of this viewpoint believe that high expectations—like pride—come before a fall, and that economic growth forecasts now revised downwards to 3.8 percent in the last quarter rather than the heady 6.1 percent forecast earlier will give the market a chance to outperform expectations, and investors the opportunity for upside buying.

Many experts remain bullish noting that corporate profits remain strong and that the sectors that delivered the strongest third-quarters results are those that usually rally first during economic recovery. They believe the odds favor a rising market through year-end, though many urge cautious optimism.

And, for those who like to consider historical precedents, it is cheering to note that history demonstrates that stocks perform best during the third year of a presidential term –especially when a president is up for re-election. The S&P 500- up 18 percent so far this year--gained 34 percent in the year before President Clinton’s re-election in 1996.


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