Stock Market: Challenges Remain But Buying Opportunities Abound
The May rally brought some joy to investors who’ve grown accustomed to the anxiety induced by the stock market’s recent knee-jerk gyrations. With only a little stutter, when trading volume declined as investors paused in anticipation of the long Memorial Day weekend, we saw Nasdaq posting a 9 percent increase over the previous four weeks, and the Dow gaining 5 percent to reach 10542.
And so, what do the pundits forecast as we enter the summer months? Some believe that the year’s big losses in blue chips have created attractive buying opportunities, and are urging investors to take a second look. They believe that beleaguered corporations like IBM, Eastman Kodak, Verizon and Lucent are due a comeback, and that severe selling has beaten these stock prices well below their intrinsic worth. They note that shares of many of these tarnished market leaders have lost 15 percent or more this year - a disproportionate decline from the moderately weak market averages - and point to the companies’ potential future earnings and their clout in the respective market segments they occupy. Other bulls believe that negative or flat returns are part of a normal trading pattern - necessary if gains are to be made in the future.
Analysts recognize that the seesawing market frustrates investors who believe in the long-term earnings potential of the companies in their portfolios. These investors view recent declines as a temporary blip and have faith in the fundamentals. Experts urge investors to hold fast, take comfort in the dividends they receive, to look beyond the stock market’s knee-jerk reactions, and to remember that the Dow is not always a good barometer of the overall health of the market. They urge investors to bear in mind that the individual performance of one or two major players can skew the overall performance of the Dow Jones Industrial Average (DJIA). Last year, Merck acted as a brake, and this year, General Motors and AIG’s woes are dragging the Dow down. This being said, the bulls note - that after the pullback in the S&P 500 index - that the S&P is trading at only 16 times 2005 earnings.
The Big Picture
Other experts point out that various hedge funds can be the catalyst for abrupt spikes in stock prices. With the huge amounts of financial resources available to them, these funds are able to create a stampede if they shed or acquire equities in response to quarterly earnings’ warnings or other corporate news.
Which sectors do the optimists favor? Opinions vary, as always, and some believe health care stocks are poised for profit, citing the huge sell off of industry stalwarts like Pfizer and Johnson & Johnson; others favor financial stocks, especially corporations with wide ranging services and a good track record in risk management. Most believe that the path will be choppy but that patience will pay off.
Whatever their predilections, Wall Street gurus urge investors to ignore gyrations created by short-term news and look at the big picture - both in terms of how they allocate their assets, and in the equities they choose to buy.