Small Investors Outwit, Outwait, And Outperform

The little guys apparently got it right.

While the stock market downturn early in April brought out the pessimism and predictions of a bear market from Wall Street professionals, individual investors generally sat tight in their stock market mutual funds.

Their patience paid off. The stock market, this week and last, defied the doomsayers and retraced most of its springtime losses, defining the downturn as both a textbook correction and another buying opportunity.

If you missed that opportunity, it may be gone. The Dow Jones industrial average soared almost 180 points Tuesday, adding another 40 points Wednesday.

The Dow was down about 50 points yesterday morning.

"The Dow will probably set some new highs," in the weeks ahead, says Greg Nie, at Everen Securities in Chicago. "The correction is over, at least for the short term. The feel and look of this market are now very solid,"

Driving the market is the expectation of slower economic growth with no inflation in the second quarter. That should give a big boost to stocks, say analysts.

That sentiment follows a near 10 percent decline, between March 11 and April 11, when the Dow dropped from a record close of 7,085 to 6,391. The Dow, Wall Street's oldest and best-known stock index, Wednesday climbed back over 7000, surprising most analysts.

"Usually, after a decline like that of March and April, the recovery period is much longer - a couple or three months minimum," observed William LeFevre, an analyst at the New York investment firm of Ehrenkrantz King Nussbaum Inc.

The optimists, expecting a long-term bull market, describe the correction as a passing shiver, the sort of momentary attack of nerves that occurs in all bull markets.

"It sure looks like the correction is behind us," says Hildegard Zagorski, an analyst at Prudential Securities. "Our strategist, Ralph Acampora, is now telling us that the Dow is once again on target to hit a high of 8200 points this year."

Strong first-quarter growth, with an annual clip of 5.6 percent reported Wednesday, was largely discounted by Wall Street after traders noted that business inventories had risen sharply, thus helping hold down inflationary pressures. Moreover, a closely watched survey of purchasing managers suggests a slowing economy, lessening the pressure for higher interest rates.

But even a strong economy now sits well with Wall Street. Stock analysts earlier worried that strong growth would bring higher interest rates when the Federal Reserve meets to adjust them May 20.

But a key report this week, the labor cost index, showed virtually no inflation in wages. It's the best of both world's: a robust economy and weak inflation.

Yesterday, the Labor Department said the number of first-time claims for jobless benefits shot up by 28,000 to a seasonally adjusted 347,000.

It was the highest since January. And while that number suggests discomfort in the working community, it bolsters the view of low inflation now in vogue on Wall Street.

A report on the national unemployment rate for April was expected today after press time.

"There's heavy trading based on [this week's] statistics," says Peggy Farley, managing director of AMAS Securities Inc.

"There's just no sign of increasing inflation. Some wages are up marginally, but that's not feeding into prices."

"There's no reason for the Fed to raise interest rates" on May 20, she says.

The possibility of an additional interest rate hike, or even a series of hikes, has dragged markets lower in recent weeks. The Fed raised rates for the first time in two years on March 25.

But Ms. Farley's take on rates and markets is not universal. There are almost as many interpretations as there are analysts.

"I think the Fed's still in the game," says David Blitzer, chief economist at Standard & Poor's Corp. "I don't believe that most people on Wall Street yet realize that the Fed" is going to raise rates on May 20. "The market has not yet priced in another rate hike."

If rates are boosted, probably by another quarter of a percentage point, similar to the first hike, "the market will react sharply and negatively," he reckons.

"The correction is not yet over," says Mr. Blitzer. Whether there will be additional hikes this year will depend on what the economy does during the second quarter."