Is this the summer rally?
For two weeks, Wall Street has been trying to shake itself free of inflation fears long enough to get a rally rolling, and it has the numbers to prove it.
As the accompanying chart shows (on the inside page), the Standard & Poor’s 500 index, a broader gauge than the Dow Jones industrial average, has had a nice little run since the 4th of July break, rising from 446.20 to 454.16 last Friday. The Dow industrials are up more than 100 points for the same period.
Conventional wisdom says the market may run up a little between now and the end of the year, but will fall back fairly quickly. Elaine Garzarelli, Lehman Brothers’ stock forecaster, sums up this position.
She prognosticated last week a Dow industrial average between 3,500 and 3,900 for the rest of the year, with rallies of 4 percent to 7 percent. She said to expect no catastrophe, with the downside potential no more than 20 percent off the year’s high. Holding back the market will be slowing economic growth, rising interest rates and the dollar’s trouble against the Japanese yen.
Chicago’s own Marshall Front, managing director of Trees Front Associates and a longtime market seer, says conventional wisdom may be too timid. In fact, he says one excellent indication of better things to come is the near-total agreement on Wall Street that better things aren’t coming.
His contrarian analysis is that fears of jacked-up interest rates and a lower dollar are overdone. The dollar may have seen its low against the yen for the year, Front says, and the fears of renewed inflation and steep interest rate hikes are overdone.
“This rally could take the market to new highs,” said Front. “Any subsequent correction might prove to be quite shallow.
“There are implications for individuals who want to put money in the market but are waiting for a deeper correction. Commit some money now, rather than wait until later in the year.”
This column’s view is the market will fluctuate, and using the dollar-cost averaging principle is an especially good idea for now. If you want to own 1,000 shares of a particular stock, for example, buy them in two or three lots over a significant period of time.
Dollar-cost averaging, known in the trade as DCA, means putting regular amounts at regular times into stocks or mutual funds. It works well over a period of at least 18 months to two years and is especially suited for mutual funds, where investors can invest monthly in round amounts without worrying how many shares they are buying.
For example, with $10,000 to invest, you could pick a mutual fund family with a money-market fund and a stock fund you like. Put the $10,000 into the money-market fund and tell the company to put $750 a month into the stock fund until the $10,000 runs out.
Then go on vacation.
If nothing else, DCA takes some worry out of investing. Is this the summer rally or is this a break to the downside likely before Labor Day? If you’re putting regular amounts in the market, it doesn’t matter.
Heartland report: This column reported Acme Metal’s record-setting earnings for the second quarter in Friday’s paper and got a call from Howard A. Learner, who was influential in negotiating Commonwealth Edison’s record-setting rebates to consumers and industrial users last year.
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Acme’s spectacular performance, Learner said, could be due in part to its Edison rebates. Edison’s 20 biggest industrial users are due to get a total of $60 million in rebates, which will impact bottom lines.
Acme’s spokesman, Charles Nekvasil, says Acme has done it on operating income, not Edison rebates. Acme reported in the fourth quarter of last year a $300,000 gain from the Edison rebate program.
With production up, Acme is using more electricity now, and the rebate is based on use. But Nekvasil estimated the second-quarter profits of $1.20 a share owed only about 7 cents a share to Edison, a number that would have been welcome at many a steel company as total earnings not so long ago.
Steel industry analysts say Acme’s performance reflects strong industry fundamentals, and will be repeated as other steel companies report their second-quarter earnings this week.
“Acme’s incredible success has been based on industry fundamentals, lower operating costs and an improved product mix,” said a Merrill Lynch commentary. “All steel producers will likely benefit from the industry fundamentals, and many should also have improved efficiencies and richer product mix.”