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Figures pointing to bear market may be misleading

Published Sep. 28, 2005

Is this a bear market? For the stars of the last bull market, the answer is certainly yes. But for other stocks, all is not lost. Many stocks did quite well this year.

Take the Standard & Poor's 500. In 1999 it rose 19.5 percent. Last year, it dropped 10 percent.

But if you look at the individual stocks in the index, a different picture emerges. In 1999, 241 of the 500 companies in the index gained, while 256 fell. But through the middle of last week, 276 stocks in the index were up, while only 218 were down.

So why do the percentage gains and losses tell such a different story? Because the big winners in 1999 and early 2000 were technology stocks, and their performance pulled up the average even while many other shares were lagging. Like most stock indexes, the S&P is capitalization weighted, so the movement of the companies that investors value the highest has the largest impact on the index. And tech stocks in the S&P index can be quite large.

If you instead calculated the index with every stock given the same weight, the S&P rose 11.9 percent in 1999 and was up 10.1 percent through Wednesday, reports Gina Moore of Aronson Partners, a Philadelphia money management firm. If those were the numbers that people focused on, the year would look just fine.

Those numbers overstate how well the overall market has done, however. With credit markets tight, it helps to be generating enough cash to not have to borrow, or at least to have a good credit rating. Outside the S&P 500, even companies involved in currently favored industries are more likely to be facing a financial squeeze, and most stocks are down this year.

Howard Silverblatt of Standard & Poor's Quantitative Services reports that within four sectors of the S&P 500 _ health care, financial, energy and utilities _ 86 percent of the stocks were up in 2000, while only 39 percent rose in 1999. In technology and telecommunications the figures are almost the reverse: Just 31 percent were up last year while 86 percent gained in 1999. Cyclical companies, or ones that would likely suffer in a recession, also did badly late in 2000 amid indications of a slowing economy.

From 1995 through 1997, the bull market was good for almost every company. Then, starting in 1998 it became more selective and by late 1999 and early 2000 it was focused on a fairly narrow group of stocks, many of them highly speculative. The big market news of 2000 was the bursting of the bubble for many of them.

The collapse of Nasdaq appears to have damaged consumer confidence and contributed to the poor holiday sales last year. But most investors have stuck to the stock market, even as they abandoned Internet retailers and saw Microsoft lose 62 percent of its value.

While there are far fewer hot technology stocks, some such as Brocade Communications, a maker of equipment used by Internet companies, have continued to prosper in the stock market more on hopes for the future than on current operations. A Bloomberg News survey showed Brocade insiders sold $1.1-billion of stock as the share price soared 116 percent, leaving the company valued at $23.7-billion. Brocade's revenues for the fiscal year just ended leaped 379 percent, to $329-million. It earned $68-million.

If a real bear market means investors have lost all faith in stocks, then this market does not qualify.