2001 Brings Hope Wall St. Has Seen Worst

Wall Street today kicks off the first trading of the new year with high hopes that the worst is past for stocks.

Of course, investors have heard that line plenty of times in recent months.

The stock market closed out 2000 on Friday with losses in most major indexes, with the battered Nasdaq composite adding insult to injury by slumping 3.4% to 2,470.52 in the session--the first time in Nasdaq’s 29-year history that it lost ground on the last trading day of the year.

The Dow Jones industrials start the new year at 10,786.85, after falling 0.8% on Friday, and the Standard & Poor’s 500 is at 1,320.28, after losing 1% on Friday.

But the market’s bulls say last week set a better tone for the start of 2001 than Friday’s action might suggest. Most major indexes gained for the week: The Dow rose 1.4% and the S&P; gained 1.1%. Of 28 stock mutual fund sectors tracked by Morningstar Inc., 27 rose for the week.

The lone exception: tech-sector funds, which fell 0.5%.

The bullish spin on the week was that the last of year-end tax-related selling hit Nasdaq and the tech sector Friday. With Nasdaq off nearly 40% for the year, many investors apparently continued to sell stocks to record tax losses, figuring they had no good reason not to do so.

With the start of the new year, of course, that tax-related selling will be gone. What’s more, January traditionally sees a surge of money into the market as investors put year-end bonuses to work or launch new retirement savings plans.

Charles Biderman, editor of Liquidity TrimTabs market newsletter, argues that with record sums of cash on the sidelines (in money market mutual funds) and few new stock offerings in the pipeline to soak up investors’ dollars, bargain-hunters should run rampant this month.

“We see no reason for stocks to do anything but go up over the next few weeks,” he said Monday.

But many investors may find plenty of reasons to stay away, analysts note--with the economy slowing, the Mideast situation deteriorating and soaring natural gas prices hitting businesses and consumers hard.

This week’s action in stocks could be particularly telling in the case of Nasdaq. Investors’ willingness--or lack thereof--to buy beaten-down tech stocks could have a cascading effect, either way. Investors who have been waiting for a good time to buy might be quickly pulled in by any significant rally, or they could become even more reluctant to step up if tech stocks plunge anew.

One recent trend Nasdaq bulls are dying to see terminated is the Nasdaq composite index’s inability to rally for three straight sessions. The index hasn’t been able to put together a hat trick since late August. When it happens, it will be fodder for the bulls to argue that a major rally is underway.

January could be key for the stock market for a number of reasons. Among the events and issues on the market’s near-term horizon:

* Corporate earnings reports. The number of companies warning about weaker-than-expected fourth-quarter earnings already is up dramatically from recent years--505 so far, versus 257 at this time a year ago, according to First Call/Thomson Financial.

But the number is misleading, because earnings “pre-announcements” in general are up. In fact, 187 companies have said their results will be better than expected, compared with 93 a year ago.

More companies are pre-announcing results, good or bad, because of the Securities and Exchange Commission’s new rules requiring firms to share relevant information with all investors at the same time.

Still, there is no question that earnings growth overall is slowing sharply with the economy. Fourth-quarter operating earnings for companies in the S&P; 500 index now are expected to rise just 4.8% from a year earlier, according to First Call. By contrast, third-quarter profits rose 18.4%.

Earnings in the first half of 2001 also are expected to be very weak. The unanswered question: How much of an earnings slump have investors already factored into stock prices? Or as Chuck Hill, research chief at First Call, put it: “When will the market be ready to look over the [profit] valley?”

* The Federal Reserve. The central bank is widely expected to cut its key short-term interest rate, now 6.5%, when policymakers gather Jan. 30. But many economists believe the Fed could act to cut rates even before its meeting, to stop the economy’s slide.

“More and more investors expect the Fed will respond by lowering interest rates, which should revive economic growth and boost stock prices,” says Ed Yardeni, investment strategist at Deutsche Banc Securities. “The good news is that the bad news is mostly all out” in the stock market, Yardeni argues. And Fed rate cuts historically have helped fuel bull markets.

But the market doesn’t always respond quickly to cuts, other analysts note. There’s also a risk that, if the Fed chooses to go slow with rate cuts, investors’ fears could mushroom that the central bank is moving too late to stop a recession, triggering renewed dumping of stocks.

* OPEC’s next move. Even as natural gas prices have risen to record highs in recent weeks, crude oil prices have slumped. But now OPEC appears set on cutting oil production when it meets Jan. 17.

Last weekend, Saudi Arabia called on OPEC to trim production to shore up prices. If the market expects a significant cutback, and oil prices zoom, it could be another blow to hopes for an economic “soft landing,” some experts warn.