NEW YORK (CNN/Money) - It feels strangely like October 1998, doesn't it?
Four years ago, the markets bottomed in early October after a tumultuous summer. Fast forward to 2002. The major market barometers hit their low point for the year on Oct. 9 after a tumultuous summer. The S&P 500 is up 15.6 percent since Oct. 9. The vast majority of companies in the index have increased during this time and a sizable portion are up more than 25 percent.
In 1998, tech stocks in particular went on an explosive tear. And the biggest winners during this October rally are tech and telecom stocks. Nine of the top ten gainers in the S&P 500 are either in the tech or telecom sector. AT&T Wireless is the best performing stock in the S&P 500 since Oct. 9. It has more than doubled. TMP Worldwide, which owns job placement site Monster.com, and Power-One, which makes power conversion products for telecom companies, have also increased more than 100 percent.
| Source: Standard & Poor's |
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Of course, most tech stocks are still well off their peak levels despite the recent big gains. For example, communications chip maker PMC-Sierra is up almost 75 percent since Oct. 9 but it remains nearly 84 percent below its 52-week high.
The lone non-tech or telecom company in the top ten is also in an industry with incredibly weak fundamentals: Delta Air Lines, with a 66 percent gain. Other airlines have also surged in the past two weeks. AMR, the parent of American Airlines, is up 58 percent. Southwest Airlines has gained 35 percent.
Looking at other big winners, there's a definite trend. The companies with the biggest bounces are for the most part in industries that have been hurt the most this year. In addition to tech and airlines, big investment banks have also enjoyed nice pops. Merrill Lynch is up 40 percent. Citigroup, J.P. Morgan Chase, Lehman Brothers and Morgan Stanley have all gained more than 30 percent.
If Oct. 9 was truly the bottom of this nearly three-year long bear market, than the strong performance of tech, telecom, airlines and financials makes a lot of sense, says Subodh Kumar, chief investment strategist for CIBC World Markets.
"Usually, the groups under stress bounce the most at a bottom since they would benefit the most when the economy improves," says Kumar. "If the Fed keeps rates low and corporate activity perks up, financials, tech and airlines all should benefit from increased spending.
| Source: Standard & Poor's |
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The big risk of course is that corporate spending doesn't pick up any time soon. Most tech companies haven't indicated that business is getting any better just yet. The post Oct. 1998 rally continued until March 2000 because fundamentals got stronger. But unless there is firm evidence of a recovery in corporate spending in the near future, it's hard to imagine how the group can continue to keep climbing.
It's harder to find a broad trend when looking at the worst performers in the index, though. The biggest loser is fast food chain Yum! Brands. But after that, you also have energy companies CenterPoint (which changed its name from Reliant last week) and TXU. Others among the ten biggest laggards are retailer Sears, oil company Amerada Hess and tiremaker Cooper Tire and Rubber.
But there is one thing that links these companies. All have issued disappointing results in the past two weeks. Yum! reported a decline in same-store sales. CenterPoint lowered its 2003 earnings guidance. TXU, in a public about-face, slashed its dividend. Sears reported massive problems with its credit card business. Amerada Hess posted a huge quarterly loss. And Cooper Tire cut its outlook for the fourth quarter.
The moral of the story? Even when the market is undergoing a monstrous rally, investors will probably punish individual companies that have unpleasant surprises in their earnings reports. In other words, fundamentals still matter.
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