Waiting for stocks to rally? Don't hold your breath
NEW YORK -- Rocky start. Second-half rebound. A gain for the year. That sums up Wall Street's 2008 stock market forecast back in January.
The first part of that prediction has been dead-on. The Dow is down 15.4% this year, 20.8% below its October record high and, as of Wednesday, officially in its first bear market in almost six years.
But the comeback call is looking like a long shot.
Many stock pundits are backing off their prediction for a sizable rally in the final six months of the year. Finishing 2008 with a gain may be too much to expect.
"We will be lucky if we get back to even," says Jason Trennert, founder of Strategas Research Partners. In January, Trennert was the most bullish strategist polled by USA TODAY, predicting a full-year market gain of 14%. The Dow would have to rise more than 18% from current levels to avoid its first losing year since 2002.
What went wrong? Wall Street's upbeat outlook was upended largely by gushing oil prices. At the start of 2008 few, if any, analysts plugged $140 oil into their spreadsheets. The 50% spurt in oil this year to a record $143.57 a barrel has deepened the economic gloom in the USA and delayed an expected recovery.
Increasingly, as oil goes, so goes the stock market.
If oil shoots up to $170 a barrel this summer, as OPEC warned, or hits the $200 target of investment bank Goldman Sachs, stocks are in for a rough ride. The Dow is already near a two-year low.
"A prerequisite to having a better market is to have a major crack in oil prices," Trennert says.
But the unexpected and unprecedented rise in energy prices is not the only hammer causing major headaches for investors.
Wall Street was betting that other big negatives such as the credit crisis, housing slump and slowing economy that hampered stocks last year would be fading from view by now, paving the way for a brighter future. But it hasn't worked out that way — at least not yet.
Indeed, it can be argued that all of these headwinds are causing as much uncertainty now as they were three or even six months ago.
"Investor confidence has been jilted," says David Chalupnik, head of equities for First American Funds.
By now, the massive interest rate cuts by the Federal Reserve, which began in September and lowered short-term rates to 2% from 5.25%, were supposed to have jump-started the economy. But skyrocketing energy prices have offset much of the Fed's work.
"Recession fears have not lessened, they have increased," says Chalupnik, adding that the Fed rate cuts have fueled inflation in commodities. The sharp jump in prices on everything from gasoline to corn to meat is making it even more difficult for American families to make ends meet. Due to that squeeze, consumer confidence has dropped to levels not seen since the 1970s.
Could higher interest rates help?
Some money managers say stocks might fare better if the Fed starts raising rates. The reason: Low rates have been a big factor in the decline in the value of the U.S. dollar and the resulting price gains in commodities, which are priced in dollars.
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