By Arnie Kaufman
Psychology took another hit last week, as a weaker-than-anticipated March employment report dashed hopes the economic slowdown is ending. With analysts continuing to cut earnings estimates and downgrade stock recommendations, the averages turned lower again after a strong one-day rally. Short sellers were back in the driver's seat.
S&P chief economist David Wyss now sees the chances of a recession as more than 40%. The likelihood of an inter-meeting Fed easing has also increased. But the market just now is more concerned with corporate profits than interest rates. Our 2001 operating earnings estimate for the S&P 500 is already below last year's results.
The list of concerns is even longer. European economies are weakening, Japan continues to stumble, energy worries persist and Cold War embers are flickering.
Surprisingly, sentiment indicators are saying that investors are not sufficiently dejected to wash out the selling, that more fear and loathing is needed.
Wall Street strategists generally concur that further market weakness will have to be endured before a recovery develops, and they believe the eventual advance will be tortuous. The feeling is that bellwether tech issues are so deeply depressed that any price improvement would attract selling by disillusioned investors seeking better opportunities to get out.
It should be noted, though, that the market often confounds. The stronger the consensus on why it is doing what it's doing, what is needed to change things and how the future will unfold, the more likely the conventional wisdom will prove faulty.
We'd keep in mind that the decline thus far has removed much of the excess in stock valuations and that there's a lot of cash on the sidelines to fuel a rise once it gets under way. We continue to believe that bargain hunting now will pay off in time.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook