New Year Rally Fades as Profit Worries Further Damp Stocks

After a strong start to 2002, the stock market has faded over the last week, raising fresh concerns that the fourth quarter’s big rally may have run out of gas.

Wall Street’s advance in the first few days of this year was the sign many hopeful investors were looking for: Historically, the market’s direction in the first five days of January has reliably foretold its performance the rest of the year.

But after an initial spurt in the new year, share prices have turned soft since Jan. 4. Many analysts still think stocks will post gains this year, but widespread projections of a robust January are thus far being dashed.

On Monday, the Dow Jones industrial average slipped for a sixth straight day, falling 96.11 points, or 1%, to 9,891.42. The Nasdaq composite index declined 31.72 points, or 1.6%, to 1,990.74--its first close below 2,000 since Jan. 2.

Both the Dow and Standard & Poor’s 500 index are down year to date, while Nasdaq clings to a 2.1% gain.

On Monday, stocks were hurt in part by negative comments by Merrill Lynch’s chief U.S. stock strategist, Richard Bernstein. He advised clients to lighten their holdings of stocks, saying corporate earnings won’t recover quickly and terming share valuations “extreme.”

He suggested clients reduce stocks to 50% of their total portfolio from 60%, while boosting bond holdings to 30% from 20%. “Cash” holdings should be the remaining 20% of holdings, Bernstein advised.

The U.S. market also was under pressure after a weak day in Europe, where stocks were broadly lower. On the New York Stock Exchange, losers topped winners 19 to 12 in moderate trading.

Analysts have been hoping for a strong January to boost investors’ confidence. Just as the trend in the first five trading days historically has been a good indicator of the trend for the year, the market’s performance for the full month has more often than not been predictive of the year.

A big reason why stock prices often have rallied in January: Many companies dole out annual bonuses this month, and workers often have promptly funneled that cash into stocks.

But that is not happening this year--at least not yet, some analysts say.

Since Jan. 1, individual investors have yanked a net $2.2 billion from stock mutual funds, according to investment newsletter Liquidity Trim Tabs. That’s the first time since the newsletter began tracking the trend in 1994 that the start of the year has been greeted with outflows.

Since Christmas, stock fund net outflows have totaled $1.2 billion. By contrast, a net $25 billion poured into stock funds in the comparable period last year, according to Liquidity Trim Tabs.

Stung by their losses in recent years, individual investors are reluctant to devote much new cash to stocks, said Charles Biderman, the newsletter’s president.

“If you were one of the people who [helped to] put in $25 billion last year and then watched [the market] collapse ... are you going to put money into the market now?” Biderman said.

The market’s stumble Monday could be traced partially to Alan Greenspan’s comments on Friday, analysts said. The Federal Reserve chief warned of “significant” economic risks and said the U.S. economy might not snap back as quickly as many people have hoped.

“We were all teed up to go higher ... and then Greenspan came out and basically threw cold water on the rally,” said Robert Nichols, chairman of Windward Capital Management in Westwood.

Michael Moskow, president of the Federal Reserve Bank of Chicago, sounded a more upbeat tone on Monday, but investors were unmoved.

The market’s fourth-quarter rally was based on the belief that the economy was showing clear signs of improvement, and that a rebound in corporate earnings was not far behind, experts note. Now, it appears that “the [economic] recovery will occur, but it may not happen in the first quarter, and a lot of people were counting on that,” Nichols said.

Many investors are holding off on new stock purchases until fourth-quarter corporate earnings reports--which will begin pouring out this week--give a clearer picture of the outlook for 2002, analysts say. Many companies use the reports to discuss the year ahead.

Stocks may be eschewing their traditional January rally in part because the market’s normal dynamics were sped up by the Sept. 11 attacks, said John Bollinger, a money manager and author of “Bollinger on Bollinger Bands.”

Many institutions that might have been planning to dump stocks later in the year did so immediately after the attacks, he said. Then, purchases that might have occurred later in the year were accelerated as stock prices hit three-year lows after the attacks, he said.

Now, many investors appear anxious to harvest their gains from the fourth-quarter rally, Bollinger said. “A lot of people are, frankly, squaring their books and taking their money out of the market,” he said.

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Market Roundup: C8, C9

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Major stock indexes started the year strong, rallying briskly in the first three trading days. But since then the market has turned down again, with the blue-chip Dow industrials leading the way.

Percentage change:

Monday First 3 days Since

Index close of 2002 Jan. 4

Dow industrials 9,891.42 +2.4% -3.6%

S&P; small-cap 229.39 +2.2 -3.4

S&P; mid-cap 500.71 +1.9 -3.3

Nasdaq composite 1,990.74 +5.6 -3.3

S&P; 500 1,138.41 +2.1 -2.9

NYSE composite 579.04 +1.2 -2.9

Wilshire 5000 10,611.60 +2.1 -2.9

Source: Bloomberg News