Wall Street historically forecasts recovery but history hints at a longer wait
NEW YORK — Historically, economic recoveries have been forecast on Wall Street in a simple fashion: Stock prices rebound first and an earnings recovery occurs soon after. But if the market’s recent performance is an accurate indicator, a business turnaround isn’t any closer at this point than it was when 2002 began.
In fact, it might be even more elusive.
Consider that the Nasdaq composite index has slid about 10 percent this year, and the Standard & Poor’s 500 index has lost 3.2 percent.
Meanwhile, Wall Street’s safer haven, the Dow Jones industrial average, is up just 1.7 percent.
“The prognosis is not real happy,” said Gibbons Burke, editor of Markethistory.com, a financial research Web site.
Burke said that if Wall Street does follow past patterns, stocks could be in for a really long slump following an extended expansion that began in 1982.
“What has happened in the past, after big runups like this, is the Dow has engaged in a very long-term decline or has been flat in order to digest the growth it has experienced,” Burke said.
Just how long of a wait is the market in for?
At worst case, it could be years, Burke said.
According to his research, the Dow reached a high in 1966, but then lost 75 percent of its value between that point and the low it made in 1982.
“I hate to be a doom and gloomer, because I am not sure we are at that point,” Burke said.
Unfortunately, over this past week, blue chips didn’t do much to convince Burke — or investors — that a recovery will happen sooner, rather than later.
IBM on Monday warned of weaker first-quarter profits and revenue. Then on Thursday, the newsletter SEC Insight said IBM was the subject of an inquiry by the Securities and Exchange Commission. After the market closed — and the Dow had tumbled 205.65 — the SEC said it had opened and closed an inquiry without any action.
Also Thursday, GE slid 9.3 percent on first-quarter earnings that met expectations, although revenue fell short of estimates. GE’s news rattled investors because the conglomerate operates so many different types of businesses, including financial services, media and manufacturing.
Investors reasoned that if such high-profile companies were struggling, then other firms most certainly are suffering as well.
Analysts said high stock prices and unrealistic growth expectations are why the stock market hasn’t been able to sustain investors’ hopes in an economic turnaround.
Despite the market’s decline, stocks still cost too much given the degree to which earnings have eroded, said Gary Kaltbaum, market technician for Investors’ Edge Partners in Orlando, Fla.
“The stock market is a leading indicator of economic recovery. But the market also goes by valuation. Historically, bull markets start off with prices at 15 times earnings on the Standard & Poor’s (500 index), and we are sitting at 30 times earnings right now,” Kaltbaum said. “You have a market that wants to go up…but it is taking a hit on valuations.”
Burke agreed, noting that stocks in the S&P 500 are trading well above their historic monthly average of 16.5 times earnings — or $16.50 for $1 of earnings.
“Stocks are expensive right now. Companies either need to grow their earnings to justify the price, or prices have to come down,” Burke said.
Unreasonably high expectations for earnings growth also factor into the market’s malaise, said Brian Belski, fundamental market strategist for US Bancorp Piper Jaffray.
“We are in the process of turning from negative to positive earnings,” Belski said. “But the problem is Wall Street is still pounding its fists, wanting growth…Considering the type of inflated earnings we had and then the earnings depletion, it is going to take a while to get the growth that people want.”
The market’s major indexes mostly ended the week lower.
For the week, the Dow lost 80.82, or 0.8 percent, despite gaining 14.74 Friday to close at 10,190.82.
The Nasdaq finished the week down 13.84, or 0.8 percent, despite gaining 30.95 Friday to close at 1,756.19.
For the week, the S&P declined 11.72, or 1.0 percent. It rose 7.32 Friday to 1,111.01.
But the Russell 2000 index, the barometer of smaller company stocks, had a weekly gain of 17.70, or 3.6 percent. It rose 11.73 Friday to 515.46.
The Wilshire Associates Equity Index, which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues, ended the week at $10.505 trillion, down $45.460 billion from the previous week. A year ago the index was $10.852 trillion.