There’s still a big gulf in investors’ mood

There no longer are bombs over Baghdad, but many American investors are still in a state of shock and awe, so financial advisers are anticipating only a modest recovery in the economy and stock market in the second half of the year.

In stark contrast with the end of the 1991 Persian Gulf War, the quick resolution has done little to restore client confidence to its full vim and vigor. While clients are generally more optimistic than they were before the fall of Baghdad, most remain in a wait-and-see mode.

“People are looking out the window, and they are seeing the rain has stopped, but it’s still a little cloudy,” says Andrew Tapparo, president of Tapparo Capital Management, which oversees about $22 million in assets and is based in Topsfield, Mass. “In the past, they may have ventured outside. But now, they are really waiting for the sunshine.”

The sunshine could be further delayed by the impact of the severe acute respiratory syndrome (SARS) outbreak on the world economy and confidence.

Mr. Tapparo and other advisers polled informally by InvestmentNews say three years of sinking stock market returns, coupled with the Sept. 11, 2001, terrorist attacks and a litany of corporate and Wall Street misdeeds, have pushed many investors to the sidelines – and they’re not ready to get back into the fray.

“Just because the war is over, it doesn’t mean that happy days are here again,” says Sung Won Sohn, Minneapolis-based executive vice president and chief economic officer of Wells Fargo & Co.

Like most investment advisers, Mark Cortazzo of Macro Consulting Group in Parsippany, N.J., hasn’t made significant changes to his clients’ holdings based on the situation in Iraq. But he is encouraging his clients, many of whom tend to be older and more conservative, not to shy away from stocks completely.

perfect time

Now, he says, is the perfect time to be investing in equities – everything from emerging growth to international to large-cap.

“When you look at this market rationally, as opposed to emotionally, you see that there are tremendous opportunities for people willing to step out in front of the curve,” says Mr. Cortazzo, who is responsible for managing about $110 million in client assets. “By the time all the unanswered questions about the economy finally get answered, those answers will already be priced into the market.”

Armond Dinverno, co-president of Balasa Dinverno Foltz & Hoffman LLC in Oak Brook, Ill., is weighing whether it’s time to “tilt” his clients’ exposure to stocks toward growth from their current value orientation.

“The Nasdaq Composite Index has outperformed the Standard & Poor’s 500 index for two quarters now,” he says. “I would think the time has come to make a shift.”

Mr. Dinverno, whose firm oversees about $460 million in assets, agrees that clients are more optimistic now that focus on the war has lessened. That optimism, he says, is making it easier for him to convince clients to re-balance their portfolios – especially if that re-balancing involves beefing up on stocks.

“They’re not calling us and telling us to jump back into equities,” he says. “But they are not nearly as pessimistic as they once were.”

Of course, investors have come by their wariness honestly.

As the dust settles around the outcome of the war in Iraq, one thing is clear: The U.S. economy is still limping along.

For the work week ended April 19, the number of workers filing claims for jobless benefits climbed to the highest level in more than a year, as struggling companies handed out more pink slips.

The Department of Labor reported Thursday that new applications rose by a seasonally adjusted 8,000, to 455,000.

It marked the 10th straight week that claims have been above 400,000 – a sign of continued weakness in the labor market. To signal that the economy is again creating more jobs than it is destroying, that number needs to drop below 375,000 and remain there for a sustained period.

Indeed, businesses struggling with anemic profits and bumpy demand from customers have been trying to keep a lid on costs. As a result, companies have been reluctant to increase capital spending and resume hiring.

The nation’s unemployment rate, now at 5.8%, is likely to inch higher in the months ahead.

Then there’s the SARS virus. While Canada, China and other parts of Asia appear to be initial hotbeds for the spread of the disease, it may be only a matter of time before there is an outbreak here.

If that were to happen, it would devastate the economy by bringing the nation’s $707 billion tourism industry to its knees.

While Wells Fargo’s Mr. Sung expects to see the economy begin to improve during the second half of the year, he says the pace of that improvement is likely to be weak.

Businesses “want to see a sustained increase in demand before they start hiring people and spending money on new equipment,” he says.

Jobs the key

Brian Nottage, an economist with Economy.com Inc., a forecasting company in West Chester, Pa., says advisers should gain a better sense over the coming weeks of just how the recovery – if there is to be one – will unfold.

“We need to see the job market pick up,” he says. “That’s the most important thing right now.”

Mr. Nottage is optimistic, however. With oil prices dropping, $75 billion in economic stimulus expected to hit the streets this year, and business productivity on the rise, the economy is poised for a long-awaited rebound.

While Mr. Nottage expects the S&P 500 to end the year at around 1100, an increase of more than 20% from the 911 it closed at last Thursday, he is not expecting the stock market to take off like a rocket as it did at the end of the Persian Gulf War.

“The big difference between this and 1991 is that this is probably the first conflict where people went into it with very high expectations,” he says. “A lot of people were surprised by how well we did in the Gulf War. With the current battle, there is much less room for a relief rally.”