NEW YORK – The big test for the stock market will come after the summer. By that time, the secret will be out on whether Wall Street is dealing with a bona fide economic recovery or just a head fake.
Just as important, the market will know whether the economy's master mechanics at the Federal Reserve will have enough insight to pull the interest-rate trigger.
It's a narrow time horizon. But it's the best that investors can hope for after nearly two years of being jerked around by tremendous stock market volatility and economic uncertainty.
Investors have now reached the point where they're tired of anticipating the rebound and sick of continuously reacting to a stream of bad news, including the almost daily scandals surrounding the wrongdoing of Corporate America.
Some people are getting puzzling vibrations that stocks may slip into a deeper trough of despondency before a sustainable recovery takes hold and they've already penciled in a weaker outlook.
This week, the market took another body blow. The Standard & Poor's 500 and Nasdaq Composite indexes dropped to October lows and the Dow Jones industrial average slid through key support levels that unleashed a flood of selling by market-making institutional investors.
WHEN PIRATES STUMBLE
Tyco International was the latest big name company to toy with investors' psychology. Dennis Kozlowski, the buccaneering chief executive of the Bermuda-based conglomerate who pocketed $405 million in salary over the past four years, resigned Monday -- just a day before he was indicted for tax evasion.
Kozlowski personified the excesses of the Great Bull Market of the 1990s by buying up companies like a drunken sailor and building one of the world's largest conglomerates. Tyco's stock crashed to a five-year low of less than $6, down from a high of more than $60 in January 2001, stunning investors still reeling from the fancy footwork of bankrupt energy trader Enron Corp. and Adelphia Communications, the embattled cable TV company under investigation for off-balance-sheet loans to its founding family.
DATA AND DOLLAR ON THE DOWN SLOPE
Investors have more than just corporate ethics to worry about. The recent batch of economic data create a lot of questions.
In April, the U.S. Index of Leading Economic Indicators fell for the first time since Sept. 11, heightening concern about how the economic recovery is unfolding. The drop stemmed in part from a weak stock market and a downsizing of consumer expectations amid the threat of job losses and slower growth in wages.
The Gross Domestic Product -- a measure of the nation's total output of goods and services -- for the first quarter was revised downward because consumer spending was slower than previously indicated. The betting is consumers have continued to cut back in the current quarter, robbing the economy of its most powerful driving force. The lowered GDP also reflected reduced spending by businesses on new plants and equipments, which is the stuff that dragged the economy into recession in the first place last year.
While some of the negative factors that have weighed down the economy may be slowly disappearing, other problems are surfacing.
Foreign investors, who financed up to 40 percent of the U.S. economy's growth over the last six years by investing more than $1 billion a day and kept America prosperous, are pulling back and looking elsewhere to invest. The dollar is in the early stages of a long-anticipated slide and foreigners are getting paid in cheaper dollars when they sell U.S. stocks. Fears of a frail economic recovery are also scaring away foreign money.
DANGEROUS UNDERCURRENTS
With growth in business investment still flagging, analysts say investors should not be out of sync with the past because historically the stock market has struggled whenever U.S. business spending and consumer spending are suspect.
And the market's overvaluation remains unresolved. Despite pathetic little rallies on improved expectations for corporate earnings, stocks remain pricey by historical measures.
"Buying overvalued stocks is a lot like dropping anchor with a long chain," says John Hussman, publisher of Hussman Econometrics Advisors. "Your boat will bob up and down with the waves, and will sail this way and that with the wind, but in the long run, you're not going anywhere."
Indeed, there are troubling undercurrents in the market.
Alan Newman, editor of Crosscurrents, a financial newsletter, says investors are facing a bull market in daily trading volumes but a bear market in stock prices -- something he has never witnessed before.
"When the Dow industrials crossed above the 10,000 mark for the first time on March 29, 1999, volume averaged 772.5 million shares per day," he says. "In the months that followed into the January 14, 2000, high of Dow 11,722, volume increased rapidly as higher stock prices were catalyzing more buying interest."
Daily volumes on the New York Stock Exchange zoomed 20.3 percent to 929.4 million as stocks rose 17.2 percent.
"But then, as volume continued to rise, stock prices stabilized, fell again and fell further," Newman says. "The pattern was one that perfectly depicted stock distribution on the most massive scale in history and the distribution continues to this day."
Stock distribution patterns are good indications of a market in trouble because they signal selling by big mutual fund managers and company insiders.
Newman says daily volumes on the NYSE have continued to explode and now average 1.214 billion shares. This is happening even as the Dow crashed 18 percent from its peak in 2000.
Yet investors continue to hold on to expectations the negative investment climate is just a passing storm cloud.
"There is a disturbing persistence in all of this stock distribution, as well as the ability of the market to work off oversold conditions as it declines," Hussman says.
"We've got extreme overvaluation, particularly in the blue-chip growth area, unfavorable trend uniformity, persistent distribution, complacent sentiment and important weakness in the dollar and corporate bonds that suggest fresh economic weakness," he says.
With investors' wealth falling, people have reasons to feel betrayed by the stock market.
And the assumption the Great Bull market of the 1990s was tremendously rewarding is erroneous. In fact, the average investor came in at or near the top of the market and overpaid for stocks, according to Newman.
Fast rewind to October and December 1990. More than $5.6 billion of net new money flowed into mutual funds with the Standard & Poor's 500 index at an average of 319. Just about the time the market reached its peak on March 24, 2000, of 1,527, investors jumped in with an additional $129 billion. Based on Newman's math, investors "bought" the S&P at an average of 916. The S&P now hovers at 1,027.
Were the rewards awesome? You be the judge.
For the week, the Dow Jones industrial average lost 335 points, or 3.4 percent, to end at 9,589.67, based on the latest available figures. The Nasdaq composite index finished the week at 1,535.48, down 80 points, or 5 percent, while the broad Standard & Poor's 500 index slid 39 points, or 3.7 percent, during the week to close Friday at 1,027.53.
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