Markets hold steady, but still need leadership

NEW YORK -- Wall Street still can't find the one key element needed for a solid recovery: a leader.

Investors are doing what they did before the Sept. 11 terrorist attacks -- waiting for a market sector to emerge and guide stocks out of their malaise. Even as third-quarter earnings reports began in earnest this past week, no one group of stocks has shown the kind of strength, or forecast the type of stability, that can inspire a market turnaround.

"We don't have the sector leadership in important sectors like technology and financials to take us out of this," said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbuam. "Any gains have been stock by stock, and not enough to move the market higher."

That's not to say stock prices aren't recovering. The major market indexes have regained much of the ground lost in the huge drop that followed the attacks. Many sectors have returned to levels near where they stood Sept. 10, but there's no indication of the strength necessary for the market to move forward.

In particular, technology and financial sectors remain weak. Those areas are considered key to any revival because they make up such a large part of the market. Financial stocks currently make up about 18 percent of the Standard & Poor's 500 index, while information technology and telecommunications stocks account for about 21 percent. Both sectors helped push stocks to record highs in the late 1990s, and their decline precipitated the market correction that began last year.

"Any renewed bull market phase is going to have these guys lead the way," said Charles White, portfolio manager at Avatar Associates. "But in financial stocks, people are wrestling with credit quality issues ... and on the tech side, there's still no visibility about when business is going to get better."

This past week, for example, Texas Instruments slightly beat analysts' reduced third-quarter expectations, but the semiconductor manufacturer lowered future business estimates -- dashing the hopes of some investors that semiconductors, considered an early gauge of tech sector health, were stabilizing. And Providian Financial's stock lost more than half its value Friday amid worries that the credit card company is facing insurmountable losses.

Airline and transportation stocks are still vulnerable because of concerns that consumers will hesitate to fly, or just stay home, because of the attacks.

Other groups of stocks are enjoying newfound popularity, but they lack the muscle and clout to spark broader market moves.

Defense stocks including Raytheon, Northrop Grumman and General Dynamics have all set new highs for the year in the last few weeks on investors' bets that those businesses will benefit in the military buildup.

Reinsurers, the companies who cover insurers, are also holding up, despite worries about the broader insurance sector. XL Capital, which has a significant reinsurance business, closed Friday at $91.80, near its new 52-week high of $95 set since Sept. 11.

"These stocks initially went down dramatically because of their liability fears, but the reality of what has happened is they're now raising rates substantially, so there aren't so many worries about their cash flow," Hyman said of the reinsurers.

Health care, consumer and energy sectors have returned to their pre-attack levels but aren't big enough as a group to lead a turnaround. Many of the stocks in those groups are trading at levels well below where they started 2001.

Market watchers don't expect a leader to emerge until earnings forecasts become more upbeat and less murky. They also want to see data showing the economy is stabilizing.

That could take a while. Third-quarter earnings reports issued this month have been mostly in line with Wall Street's reduced expectations, but forecasts for improved business are nearly impossible to find. Most analysts don't expect companies to make any bullish predictions until next year.

The economy is going to need time to heal, too. Aggressive interest rate reductions by the Federal Reserve and a proposed $60 billion economic stimulus package out of Washington should eventually revive growth should help. But consumer confidence remains fragile. If another terrorist attack occurs domestically or with troops overseas, that could further upset and discourage consumers, whose spending accounts for two-thirds of the economy.