The US two-and-a-half-year bull stock market may be coming to an end, the results of the first quarter show. The Dow Jones Industrial Average has lost 2.6% since the start of the year, and technical analysts believe that the index stands to lose about 15% off its peak in the bull market.
Tech-heavy Nasdaq is down 8.1% since the start of the year, and tech stocks are usually telltale of the general direction the market is going to take.
Technical analysts point to the growing number of stocks reaching their 52-week highs as the sign that the rally may be coming to a close. Major companies such as Intel Corp. have lost about 20% from their peaks. GE has lost 5.3 percent from its 52-week high, achieved on Dec. 14, and Citigroup, the world’s largest financial company is down 8.8 percent from this year’s peak on Feb. 4. April, according to chart watchers, may see some revival as the Stock Trader’s Almanac reports it has repeatedly been the best month of the year for the Dow blue-chips since 1950.
There are deeper factors, however, that may cause a decline in stocks. Corporate America is being dragged down by its mounting debt and pension liabilities. 360 companies in S&P 500 have defined benefits pension plans, a fact that will negatively affect their earnings as the baby boomers start retiring and the current workforce may get outnumbered by the former employees who have to be supported by the companies’ income. In 2003, 70% of U.S. corporate pension plans were underfunded by $278 billion, and the 2004 projections put this number in excess of $400 billion. The trend is likely to get worse as the nation will have 100 million retired workers by 2011. For instance, as of October 2004 GM retirees and their dependents exceeded the auto maker’s active workforce by three-to-one.
US corporate debt continues to set records, having reached $9 trillion, or 84 percent of GDP. This bulk assumes threatening proportions, considering that the recent rate hikes will increase the costs associated with rollover of short-term loans and is likely to translate into long-term rates.
The plight of US corporations is exemplified by the troubles of US largest automaker, one of the Dow components, General Motors. The once revered American company that has come to symbolize US business is now one step short of the junk status in Fitch ratings, and may approach this grade in Moody’s classification. While the professionals of the high-yield market are eager to see GM join the ranks of junk bond issuers, the overall market is likely to be adversely impacted by this downgrade.
The only indices that were up in the quarter related to energy, utilities or basic materials, reflecting the rise in energy costs that in itself may slow economic growth. The IEA predictions as to the possible drop in oil prices were based on the decline in China’s growth rate that was at 5.4% in the first quarter, down from about 20% in the past year. The same slowdown in growth could hit the rest of the world if oil prices do not drop off their sky-high levels. So far some analysts’ reports have predicted that oil prices can nearly double, including Goldman Sachs forecast of $105 a barrel.
The clouds over the US stock market may yet lift. After all, the US economic growth was at 3.8% for the past year. And it is not unusual for stocks to have a bleak quarter and to rebound later on. For example, in 1995, the Nasdaq Composite rose 39% throughout the year, despite a 8% decline from September through October.
Much will depend on the movement of the Fed funds rate. The widespread opinion is that the Fed will keep on with ’measured’ quarter-point increases till the end of the year to bring the rate to the ’neutral’ level that it will neither stimulate nor halt economic development. This rate by different estimates could range somewhere between 3.5% and 4.5%. Measured increases would set the rate at 4.25% sometime around Greenspan’s retirement. However, the recent Fed statement reveals augmenting inflation worries of Fed policymakers, suggesting that hikes in the consumption indices can urge the Fed to get more hawkish and interpose its gradual pace with a half-point hike at one time. Fears that this may slow the stock market continue to weigh on equity valuations. Later Fed movements will show whether stock investors have a reason for optimism.