Originally created 07/09/01

Wall Street takes vacation, summertime rally doubtful



NEW YORK -- Wall Street's buyers have vanished, perhaps to seek out such summertime comforts as the swimming pool and a good book. Why shouldn't they? After all, the season promises to be chilly for the stock market.

Investors simply see no reason to buy, knowing that starting this month hundreds of companies in a cross-section of industries will release dismal second-quarter earnings. Since May, more than 720 firms have warned that results will miss expectations, outnumbering those of last year's second quarter 3 to 1, according to Thomson Financial/First Call.

So what about Wall Street's usual summer rally? Unlikely.

"There is no catalyst," said Alan Ackerman, executive vice president of Fahnestock & Co.

While the past week was shortened by the Independence Day holiday, it yielded enough big earnings warnings - the biggest of which came Thursday from Federated Department Stores, Advanced Micro Devices and EMC - to really rattle the market. The warnings ignited a selloff Friday when the Dow Jones industrial average sank 227 points, and suffered its seventh straight weekly decline.

Friday's selling could have been the typical kind that follows a string of warnings, said Chuck Hill, director of research for Thomson Financial/First Call.

"The Street tends to overreact on the negative side during the (earnings) warning season and to overreact on the positive side during the actual announcement season," Hill said.

Along that line, this doesn't mean Wall Street won't see any advances between now and autumn. The market stands to have some relief rallies when companies announce earnings in line or slightly better than lowered expectations. And it might climb once the anxiety over earnings season has passed.

But it's not likely the gains will lead to upward momentum that can be sustained over an extended period, analysts said.

It seems that this past week's warnings, among the last for the second quarter, cemented growing doubts on Wall Street that business will indeed improve in the second half.

"Those were blockbuster announcements. And, they were a bit surprising in that so late in the game there is such a big shortfall," Hill said. "You have to have some sense that the bottom is in sight. I don't think that hasn't happened yet."

As buyers take a break from the stock market, perhaps they should put the market into perspective, said Jon Brorson, director of equities at Northern Trust in Chicago. Stocks will head higher and the economy will grow again, he said, but not at the stampede-style pace that defined the late 1990s.

"We have to reset our image of a bull market - not of a virile, robust bull, but a skinny, scrawny bull," Brorson said.

Like many analysts, Brorson believes business will improve in the second half, and that the broader market, reflected in the Standard & Poor's 500 index, will end 2001 up 10 percent to 12 percent.

By the fourth quarter, analysts believe that businesses will have begun to benefit from the six interest rate cuts that the Federal Reserve has made this year. By then companies and consumers are expected to borrow more money and increase their spending.

And by the last months of 2001, companies - from retailers like Federated to chip makers like Advanced Micro Devices - will have had time to whittle down excess inventory.

But remember, Brorson cautioned, "It's going to be a slow, grinding market, rather than off to the races."

For the week, the Dow lost 249.72 points, or 2.4 percent, after dropping 227.18 to 10,252.68 on Friday.

The Nasdaq composite index fell 157.08, or 7.3 percent, for the week, following a 75.95-point decline to 2,004.16 Friday.

The S&P 500 index lost 33.83 for the week, falling 2.8 percent. It dipped 28.65 Friday to 1,190.59.

The Russell 2000 index, which measures the performance of smaller company stocks, fell 29.38 for the week, a 5.7 percent decline. It lost 9.47 on Friday to close at 483.26.

The Wilshire Associates Equity Index, the market value of NYSE, American and Nasdaq issues was $11.06 trillion Friday, down $347.56 billion from last week. A year ago, the index was $13.85 trillion.