Investors expectations aren't yet meeting reality

Posted: Friday, July 18, 2003

NEW YORK (AP) Wall Street thinks the economy is on its way up, while most economic data isn't yet signaling the same. If they don't get in sync soon, the current stock rally could fizzle.

The stock market is behaving like it always does, basing its bets on expectations. The problem comes when reality doesn't live up to those hopes.

Just look back at the recent past to see what can happen. Over the last few years, economists have predicted second-half recoveries would come, but none did and shares slumped as a result.

Right now it's too soon to tell if this go around will be any different. That, though, hasn't stopped investors from betting that it will.

Sentiment gauges for both individual and professional investors have shifted to optimistic levels not seen since the late 1990s. That's fueled big stock-buying over the last three months.

The Dow Jones industrial average has climbed about 22 percent since mid-March, the Nasdaq composite index has jumped about 38 percent and the Standard & Poor's 500 index has gained more than 25 percent.

Behind this rally are beliefs that better times are ahead. With interest rates so low and tax cuts beginning to kick in this summer, investors think that should pump some much-needed money back into the economy by spurring consumers and companies to spend.

There have been hints of good news for investors to hang their hopes.

Recent economic statistics show that corporate productivity continues to rise and inflation remains in check. A recent Conference Board survey of 100 chief executives found that their outlook for the economy is currently at the highest level since the first quarter of 2002.

All that sure sounds good, but it doesn't guarantee that there will be enough of an economic pickup to satisfy investors' expectations.

The stock market has priced in very good economic and earnings numbers, so ''they better unfold because if they don't, the stock market is in for a rude awakening,'' said Hugh Johnson, chief investment officer at First Albany Corp.

Part of the problem is that investors have been cherry-picking what data to analyze, focusing on what supports their bullish cause and ignoring much else that might not.

For instance, the weak labor market hasn't rattled investors much. Jobless claims continue to rise, and the number of out-of-work Americans continuing to draw jobless benefits is at the highest level since 1983.

More important to investors should be the leading job-market indicators, like help-wanted advertising, and those, too, remain weak.

As Mark Zandi of points out in a recent report on the topic, ''Any newfound optimism will quickly fade ... unless the job market soon rights itself.''

And it's not just that. In recent weeks, stocks have advanced despite negative news on such things as the widening trade deficit and some weak earnings outlooks.

Then there are the metrics investors are using to base their buying.

Stephen Roach, chief global economist at Morgan Stanley, talks about a widely followed survey of nonmanufacturing activity put out by the Institute of Supply Management.

It surged last month, topping expectations by a wide margin, and ''was cited as a key reason why the markets should ignore the all-important June labor market surveys,'' which showed weakness in the employment outlook, Roach said.

But, he adds, the survey has only 370 respondents, which he doesn't consider an acceptable statistical size given the millions of U.S. nonmanfacturing firms.

''The bullish case for the economy does not exactly rest on the most credible evidence,'' Roach wrote in a recent report.

With investors expecting one thing and the economy showing another, something has to give soon. Hopefully, it won't have to be the big gains seen on Wall Street.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)

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