New market highs, but no raging bulls

The Dow crossed 14000 last week, but many individual investors are cautious.

Wall Street's bull market is now the third longest in history.

But it's not an animal anyone is getting excited about – even after the Dow Jones Industrial Average closed above 14000 Thursday.

Instead, excuse the yawn, it is a bull more akin to Ferdinand, the storybook creature who would rather stop to sniff the flowers, catching its breath.

The market has been rising since Oct. 9, 2002, despite low approval ratings for Congress and the president, the rising price of oil, and the war in Iraq. Not surprisingly, individual investors have more or less ignored this Ferdinand and thus have not profited from it as they have in previous booms.

"Anyone who reads the paper would be amazed [to learn that] we are in a five-year bull market and the economy is growing at all," says Jeffrey Kleintop, chief market strategist at LPL Financial Services in Boston. "By many measures it's so weak no one believes it's happening."

This market is only the 12th strongest since 1900, Ned Davis Research estimates. "It's been a slow ascent instead of a raging bull market," says Ed Clissold, senior global analyst at the Venice, Fla., stock research firm.

Last week was actually a mini example of the market's behavior. After slowly rising the first part of the week, the stock market kicked into high gear on Thursday, pushing the Dow to a 14000.41 close. Then, on Friday, the venerable average fell 149.33 points, closing the week with a slight loss.

"It seems like we've been going three steps forward and two steps back all year," says Georges Yared, chief investment officer of Yared Investment Research in Minneapolis.

In fact, despite the Dow's rise of about 6,500 points since its low point in 2002, individual investors have not piled into the market with the enthusiasm they had in the 1990s. The number of individuals owning equities has increased by only 5.2 percent since 2002, compared with a gain of 24.5 percent between 1995 and 1999, according to the Investment Company Institute, a trade organization in Washington for the fund industry.

"It seems the individual investor is not in this market in a full-fledged way," says Mr. Yared.

One reason for the blasé attitude might be the relatively narrow gains in the market – at least in the latest spurt. Since April 25, when the Dow was at 13000, the average has climbed 8 percent, but the broader Standard and Poor's 500 index is up less than 4 percent. "The move from 13000 to 14000 is mainly a cyclical move," says Sam Stovall, chief investment strategist at Standard & Poor's in New York. "The cyclical stocks are up, reflecting the view that global economic growth is not slowing as much as people think."

He says the market tries to anticipate events six months in advance. "It's saying that looking into 2008, the earnings and economic growth will be substantially better."

Some investors may also be looking ahead to the 2008 presidential elections. "Typically, in the 12 months prior to presidential elections, markets have always been good," says Yared. The average gain is about 15 percent, he estimates.

"Sometimes the candidate or challenger says what investors want to hear," he says, but adds, "They don't like to hear that taxes are going to be raised."

While many Americans may be avoiding the market, foreign investors are substantial buyers of US stocks, says Yared. "They like the cheap dollar. They are buying in at a relatively inexpensive price," he maintains. In fact, US markets may seem undervalued to them, he says, since they are trading at a price-to-earnings ratio of 16 compared with 20 to 25 in foreign markets. "The US market is the only major market with a teenaged number," he says.

However, when US investments are repriced in euros and pounds, the gains don't look so substantial, says David Kotok, chairman of Cumberland Advisors in Vineland, N.J. The dollar has been weak compared with those currencies.

"If you look at a broad index of the global markets, they are about double the gains of the US market in terms of dollars," says Mr. Kotok.

For many Americans, a key deterrent to investing has more to do with history: Some still feel burned from losing money in the markets after the dotcom bust, says economist Jason Schenker of Wachovia in Charlotte, N.C. "That's why they have looked to commodities and real estate – tangible assets," he says. "People remember the boom years of the '90s, and the economy today does not feel the same."

The main beneficiaries of this bull market have been institutional investors and sophisticated investors such as hedge funds, which often borrow money to enact their complex strategies, says Mr. Clissold of Ned Davis Research. "One of the major underpinnings of the market has been the merger and acquisition boom driven by private equity," he says. But unlike other past merger booms, the private firms don't have stocks that can go down in value after an acquisition. "So you have to look at the market like a commodity market, where there is a reduction in the supply of stocks," he says.

The number of shares that investors can buy from existing companies is shrinking as well, because of corporate buybacks, points out Clissold. In the first quarter, earnings per share for the market overall rose 3.6 percent due to share repurchases, Clissold's firm estimates. "That helps anyone who owns those shares," he says.

The recent climb in the market and the breaching of the 14000 level may help draw more individual investors into the market, says Mr. Kleintop of LPL Financial Services. "It encourages individual investors to come back."