Value Added
Investing in a Stealth Bull Market
By Steven Goldberg, Contributing Columnist, Kiplinger.com
May 21, 2002
Advertisement
Don’t sell last week’s market rally short. While the near-term future of the market is anyone’s guess, the economic recovery is on track and, aside from technology and telecom stocks, the stock market looks pretty healthy, too. What’s more, stock valuations aren’t that high -- except for those tech and telecom stocks.
A.G. Edwards chief equity strategist Stewart Freeman notes that, aside from tech and telecom, the Standard and Poor’s 500-stock index is up more than 12% in the past six months. Indeed, tech and telecom account for 70% of the declining stocks in the S&P.
Prudential Securities technical strategist Ralph Acampora says that 55% of New York Stock Exchange stocks are actually higher than they were a year ago. That’s despite the fall in the broad market averages, which are dominated by stocks with huge market capitalizations. Small and midsize stocks are the ones rallying.
“We have a stealth bull market going on here,” says Ed Yardeni, Prudential’s chief market strategist.
Stocks aren’t pricey
Salomon Smith Barney market strategist Tobias Levkovich says that given today’s low inflation and low interest rates, the median price-earnings ratio of about 22 times 2002 earnings for Standard and Poor’s 500-stock index “is far from outlandish.”
More important, the S&P’s tech sector is selling at a P/E of 46 on 2002 earnings. Take out tech and the market looks reasonably priced.
Tech stocks, historically, don’t rally until a year after the economy turns up. So there’s no reason to rush into those stocks now, he says.
Corporate earnings typically lag other economic indicators, Freeman says. What’s more, the stock market usually turns up several quarters ahead of earnings.
Beneficiaries of the recovery
“The economy is clearly moving toward recovery, and investors’ attention should be placed upon the sectors most likely to benefit,” Freeman says.
He likes economically cyclical stocks such as transportation companies, retailers and financial companies. He also sees promise in aluminum, oil service, railroad, household appliance, chemical, and paper and forest stocks.
His favorite stocks are Bank of New York (CAT), Carnival Corp. (CCL), Clear Channel (CCU) and GlobalSantaFe (GSF).
Note that A.G. Edwards’ picks ought to be objective. Investment banking accounts for only a tiny part of the firm’s business.