Bulls still on parade despite big plunge Earnings warnings, a weak housing market and $90 oil should have investors running for the hills. But they're not. October 21 2007: 11:17 AM EDT
NEW YORK (AP) -- With all the predicaments facing the markets these days -- credit growing scarcer, oil near a record $90 a barrel, home prices in the dumps -- it would be logical if investors were shoving money under their mattresses, instead of into stocks.
But logic doesn't always prevail on Wall Street.
The Dow Jones industrial average plunged almost 400 points on Friday, its fifth-straight loss for the week. Yet, Wall Street's pundits did not waver on projections that share prices will rise again after companies finish reporting quarterly financial results.
"There is a lot more people who are bullish than bearish, and there's a mentality that even a pullback would create an opportunity to buy," said Todd Leone, managing director of equity trading at Cowen & Co.
Why is Wall Street so optimistic, even though stocks took a hit Friday, with the Dow dropping 366.94, or 2.64 percent, to 13,522.02?
While there are worries about the economy heading toward a mild recession, investors are still energized by the potential for U.S. companies to grow. Companies might have had their most challenging quarter in five years, but they are still sitting on large cash stockpiles -- and those with international units are able to take advantage of growth outside the United States.
Furthermore, Wall Street doesn't expect the credit turmoil will send a shockwave through other parts of the economy. The debt markets -- roiled after defaults in subprime mortgages triggered a global aversion to risk -- have remained mostly intact and problems appear to have not spread to other asset classes.
The credit markets appear to be relatively healthy compared to the anxieties that existed just a few months ago, especially with a number of big private equity deals receiving funding that many feared would never go through. There also appears to be little curb in consumer spending in the face of higher gas and food prices, and that would only be helped further if the Federal Reserve, as is widely expected, cuts rates at its Oct. 30-31 meeting.
"Bull markets really don't die of old age," said Philip Dow, managing director of equity strategy at RBC Dain Rauscher. "The public might not be very bullish looking at what happened this week, but institutions are because there's a feeling that you can't miss the upside in trading."
He explained the market's retreat on Friday creates a buying opportunity for stocks that some investors feel were oversold. Once investors absorb the brunt of the third quarter's earnings releases, traders believe the market can rebound.
Wall Street still has a ways to go before getting a full picture of how companies fared during the quarter. Of the 123 companies that reported through last week, 67 surpassed Wall Street estimates and 51 didn't -- down from 75 and 39, respectively, last year.
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