I've always loved red. So why have I turnedagainst my favorite color? In these days offancy visual displays, most of us watch ourstocks each day on monitors that show rising stocksin green, unchanged stocks in white, and declinersin red. Without even looking at individual stockquotes, I can tell at a glance if the marketis up or down just by glancing quickly atthe screen display in my office.
Ever since March 2000, my dailypanorama of the stock market was a veritablesea of red. Slowly but inexorably, Ibecame sick and tired of red—red stockquotes and red ink flowing from corporateAmerica like a red tide sweepingacross the financial landscape made methink twice about my relationship withmy former favorite color.
RED SEA SUBSIDING
Enter 2003, my screen is green, andI love it. On happy days, the entirescreen is green. The stock markets bottomedthis past October. After that, ithas been an opportune time to moveaway from bonds and return to stocksas the only way to rebuild your nest egg. Stockshave turned up dramatically since then, and everymajor index has moved smartly higher.
Even so, the talking heads on TV have beenfighting the tape for the past 3 months. Every movehigher has been greeted with stern warnings thatthis was yet another rally in a bear market. In themeantime, the Nasdaq has moved from 1100 to1700.The S&P 500 is up about 15% for the year todate, and the Dow is back above 9000. PresidentBush is running for reelection in 2004. To prevailnext year, he will need the economy purring alongthen, which the recent tax cuts should assure.
Whether or not you like the particular stimuluspackage that was recently enactedinto law, the fact is that payroll tax cutsare always the fastest way to sendmoney percolating through the USeconomy. Lower withholding ratesmean more spending money in thepockets of consumers in each paycheckthey receive. That will occur inthe second half of this year.
Lower taxes on dividends will helpinvestors as they move away from bondsand back into stocks, particularly thosewith high yields. There are incentives forsmall businesses to purchase capitalequipment, and enough other goodiesto please many other constituencies.Stocks should see a steady increase, andwhile bonds won't crash immediately,they are destined to be a hapless investmentfrom here on out.
Everybody knows that low interest rates havesupported the housing market. Many renters arebuying homes because they can accumulate equityfor monthly payments that don't necessarily exceedwhat they have been paying in rent. Unemployedpeople have been able to keep going by refinancingtheir homes and taking cash out of their properties.In the late '90s, consumers were able to financetheir purchases out of their stock market winnings.More recently, they have been able to keep on purchasingby extracting money from their homes.
The corporate world became entirely too leveragedin the past few years. Another Greenspanobjective is to facilitate corporations' ability to refinance their debt, a process that has been under wayall year. The debt is not going away, but the interestexpense is dropping dramatically for corporations(just as lower home mortgage rates are loweringmonthly payments for individuals). While walkingthe fine line between the fear of reviving inflationand the fear of deflation, Greenspan is trying to helpboth sectors reliquify themselves by keeping rateslow and telling everyone what he's going to do.
RISING EARNINGS AND STOCKS
Hysteria about price/earnings multiples isunjustified. All the stimulus tactics discussedabove should promote higher corporate earningslater this year and in the first half of 2004. Thestock market has anticipated some of that, butthere's still enormous fear of owning stocks thathas kept many investors on the sidelines.
Eventually, the $5 trillion sitting in bank savingsaccounts and money market funds earningless than 1% will start to trickle, or flood back intothe stock market. The market didn't move straightdown, and it won't go straight up either. Sooner orlater, the market will need to pause and regroupbefore moving higher. But eventually, it will sell athigher prices than those prevailing today. Thatmeans even more green on my screen, and hopefully,a lot more green in your wallet.
Joan E. Lappin is president of NYC-based Gramercy Capital, which
has been ranked number 1 in Nelson's Directory
of Registered Investment Advisors. She appeared on Wall $treet
Week with FORTUNE on July 4, 2003. For a
tape of the show or for questions or comments, call 212-935-6909 or email