Markets & Stocks
Weighing the risks
Things are looking up for stocks. What could send them south?
September 4, 2003: 3:40 PM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - With stocks in a sweet spot, Wall Streeters are straining to figure out what might make them turn sour.

For the moment, at least, there is little on the horizon that looks like it could upset the market's apple cart. The economy is doing better than anyone expected it would a few months ago, earnings estimates are getting revised upward for a change and worries that the market could run up against one of its typical September selloffs are rapidly falling by the wayside. Finding investors who think that stocks will finish out the year higher than they are now is about as hard as hitting water falling out of a boat.

All of which makes some market watchers worry that the market has gone too far, too fast.

"We've climbed a long way here, gone a long way toward discounting the beginnings of this economic pickup," said Janney Montgomery Scott vice president Larry Rice. "I don't really want to do any investing here. I'm raising cash on the hope that I get a better opportunity and better prices on a pullback."

Even if you don't believe, as Rice does, that stocks are overvalued, it is hard to argue that they aren't more vulnerable now than they were 10 or 20 percent ago.

"I don't think that stock prices are too high, but they are higher than they were a year ago," said Bank of America Securities equity portfolio strategist Tom McManus. "That means they're not as well-priced to resist disappointment."

But while higher prices -- whether justified or not -- make the market more vulnerable to disappointment, if the disappointment doesn't come it's unclear what will send them down. The question, really, is what sorts of hurdles there might be between now and the end of the year, and whether the market will be able to clear them.

Will the recovery keep revving?

For McManus the main one is the economy. For stocks to keep their course, there needs to be continued evidence that recovery is in place. If it begins to emerge that the current quarter's growth is just a blip -- a short term reaction to the mountain of stimulus the Fed and Washington have pumped into the economy and nothing sustainable -- then all bets are off.

But even bearish sorts (and McManus is not one of them) don't think such a slowdown would emerge until, at the earliest, late in the fourth quarter. In the shorter term the main worry is that the market would take some economic report, rightly or wrongly, to be a sign that of bad things to come.

The most likely candidate on that count, said Trilogy Advisors chief investment officer Bill Sterling, would be bad news on the jobs front -- the mantra among economists is that when it comes down to it, there's no such thing as a jobless recovery. If the labor market keeps deteriorating, more investors will worry that consumers are on the verge of giving up the ghost. The August jobs report, out Friday, will be a first test.

"A lot of people are going to be watching the employment report for evidence of whether the economy has hit escape velocity," said Sterling.

Geopolitical jitters are another potential sore spot, said Sterling, but given the way the market has been able to shake off all of the lousy news coming out of Iraq, it would take something of a greater magnitude to get investors really jittery.

"While there has been a lot of unpleasant and unsettling news on Iraq, there hasn't been news that has affected the financial picture," he said. "We've lived through decades of sad stories overseas that haven't move the markets."

Eventually, said Sterling, worries over the cost of Iraq could begin to wear at the market, but this is more of a back burner issue than an immediate concern. More troubling right now is North Korea's nuclear program and the ever-present possibility of terrorism.


A third potential trouble spot for the market over the next month is companies warning on third quarter earnings. Even in the best of times, the weeks before quarter end see companies stepping up to the confessional and telling investors their results won't meet expectations.

The risk is that individual companies' problems are seen as endemic to their industry in general. Whether the market can get through the confession period unscathed may depend on how willing investors are to see a company's warning as specific to that company alone.

That should be less difficult this quarter than in quarters past. With the pace of earnings warnings for the current quarter running far below the norm, according the Puglisi & Co. director of research Joe Kalinowski, it's going to be harder to view any one earnings warning as the sign of a more systemic problem.  Top of page

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