Why Wall Street isn't flying higher

The great stock market rebound of 2002 has so far fizzled – and a major upswing is not yet in sight.

Pundits had expected that, with the US economy moving out of recession, the stock market would follow suit.

Instead, the Dow Jones Industrial Average can't seem to decide whether it wants to go above or below 10000 – a level that was thrilling in 1999 but looks tired today.

The reasons for Wall Street's reticence range from concern about the strength of the economic recovery – punctuated Friday by a jump in the unemployment rate to 6 percent – to newly sober attitudes of investors in the post-Enron market.

While most stock-market strategists still believe the current market is a "bull" and not a "bear," the debate is real and the difference for now is very hard to tell.

Investors are ambivalent. Small players, a key force behind the mid-1990s bull market, are still plowing 401(k) money into stocks. But large institutional investors have parked hundreds of billions of dollars on the sidelines.

And for all investors, the mood has shifted dramatically from the 1996, when Federal Reserve Chairman Alan Greenspan decried "irrational exuberance." The watchword now seems to be more like "rational humility."

"This market is somewhat reminiscent of the stock market of the early to mid 1970s," says Bryan Piskorowski, a vice president and market commentator with investment house Prudential Securities in New York.

Back then, stocks barely eked out gains, with share prices more often tumbling than rising, he says.

Today, rising oil prices haven't yet rippled into broad-based inflation, as happened in the 1970s, but they are holding the stock market back.

The Dow industrials closed at 10006.63 Friday, putting the average down 0.15 percent for the year so far. The technology-laden Nasdaq index has fared even worse, off 17.30 percent.

Despite strong first-quarter economic growth, factors like the ongoing conflict in the Middle East and the possibility of a cutoff in oil supplies are very much on the minds of Wall Street strategists.

"Investors don't just follow the economy," says Hans Stoll, director of the Financial Markets Research Center, at Vanderbilt University, in Nashville, Tenn. "They follow the expected economy," especially relating to the future direction of corporate profits.

"There are real reasons to have concerns about the quality of future US corporate earnings, as well as the sustainability of earnings," Mr. Stoll says.

Not only have energy costs have been climbing. overseas competition is extensive, making it hard for companies to increase product prices.

"There is just no pricing power for US companies to increase revenues and thus earnings," says Arnold Kaufman, editor of "The Outlook," a financial review published by Standard & Poor's Corp. in New York

Inventories, although being worked down, remain high, he says. The bottom line: US companies find themselves in a rut in terms of future profit gains, which makes stocks relatively unattractive, Kaufman says.

Moreover, analysts say the exposure of accounting irregularities at Enron and other firms is prompting many large companies to take steps to clean up their bookkeeping practices – sometimes lowering reported earnings. And Wall Street firms, too, have been under fire for overhyping stock prospects.

For all the uncertainty about profits, not all stocks have been mired in the doldrums.

Indeed, while large-company and technology stocks have been sagging, smaller and mid-size companies have fared well, notes Mr. Piskorowski of Prudential.

The so-called "small-caps," for one thing, are less exposed to current difficulties of the global economy – including a strong dollar that crimps US exports.

Also, smaller companies never rose to the heady altitudes of big-name stocks like General Electric (down 21 percent so far the year) or AOL Time Warner (down 44 percent).

Currently, the large firms in the S&P 500 stock index still have shares that are high-priced by historical standards.

The stock of the average S&P 500 firm is selling for 20 or more times its earnings, versus a historic average in the mid-teens. Simply put, big-name stocks still aren't cheap, even after the setbacks of 2000-2002. When companies are expensive, investors are reluctant to buy.

A divide exists not only between Wall Street and Main Street – with the economy headed up as the market struggles – but also between small investors and large institutional players, such as pension fund managers.

While big investors wait to commit hoards of cash to market, small investors generally have been hanging on to their portfolios, according to analysis by information firm Strategic Insight in New York. Money poured into stocks in March, the latest month for which final figures are available. Most of it came from smaller investors socking away earnings in retirement accounts.

"We're not in a true bull-market rally," in 2002, says Christopher Johnson of Schaeffer's Investment Research in Cincinnati. He says any market gains in recent weeks have been "bear market rallies," upward blips appearing in an overall down market. "There is fundamentally no reason to be optimistic about the market," he says.

Most market analysts do not expect a quick turnaround. "Eventually the market will get back on track, perhaps in the second half of this year, says Robert. MacIntosh, chief economist at Eaton Vance in Boston.