Hibernia Investment Brief: Will the Mardi Gras Spirit Spread to the Market? A January Market Rally Would Start the Year Off Right, But Better Corporate Earnings Won't Signal Recession's End.

Business Editors

NEW ORLEANS--(BUSINESS WIRE)--Jan. 29, 2002

Investors hoping for a rally are concerned that the stock market could remain in negative territory as January ends. Superstition says that as January goes, so goes the rest of the year. The much-anticipated January Effect, in which, historically, small stocks tend to rally due to bargain-hunting, has made only a fleeting appearance.

"There is a variety of opinions about why this might be so," said James C. McElroy, president and chief investment officer of Hibernia Asset Management, a division of Hibernia National Bank. "The early rally in the Nasdaq fizzled out. There was an attempted rally, but no follow-through. I think everyone is waiting for some kind of physical evidence of growth, but it hasn't been there," he said.

McElroy says that corporations are spoiling their somewhat better-than-expected earnings announcements with dire forecasts about the future, and the January Effect appears to have gone in reverse. "The larger stocks had moved ahead earlier in the month. But what probably comes closest to the truth when we talk about the market malaise is that there just isn't an overwhelming reason for the market to go up, so it just drifts sideways to down," he said.

McElroy points out that investors are coming up on two full years of negative stock returns. "It's the first time that has happened since 1974-75," he said. "But January is not over yet; there are still a few days to come up with a positive January indicator. Of course, last year's January was positive and that didn't get us very far."

The Fed likely to maintain rates at current levels . . .

The Federal Reserve will meet again Jan. 29 and 30. The general opinion is that the Fed will either hold the Fed funds rate steady at 1.75% or cut another 0.25%. McElroy said that the odds seem to favor no action. Even the Fed chairman is sounding more upbeat. Greenspan told Congress this week he saw encouraging signs that the country's first recession in a decade could soon end, and he admitted he had made a mistake in sounding too pessimistic two weeks ago. "There's some possibility that the Fed will be in a tightening mode before the year ends," McElroy said. "That forecast is based on the belief that the Fed will move rapidly to drain the economy's ocean of liquidity once an expansion becomes evident."

The recession isn't over yet, or is it? . . .

McElroy believes comments by Intel's CEO following its better-than-expected earnings announcement are emblematic of the mainstream view of the economy. Intel said the U.S. hasn't seen an economic recovery yet; instead, it's seeing the re-emergence of seasonal orders, which is occurring in a depressed economic environment. "In other words, don't mistake better earnings for the end of the recession," McElroy said. "I think the economy is still fragile, but getting stronger. This is the third month of positive economic numbers, but there's still some concern the recession may last longer than expected."

McElroy notes that the Fed has been aggressive in lowering interest rates since January 2001, resulting in increased credit availability and consumer and corporate borrowing, also known as liquidity. "The large amount of liquidity is the primary reason we believe the recession is at or near an end. The only debate in our shop surrounds how fast the post-recession expansion will develop," he said. McElroy also said there is a vocal minority of economists who say the recession ended in the fourth quarter of 2001, and that we'll see growth in the first quarter.

The stock market will rebound . . .

"We're standing by our forecast for a good, though not great, year for stocks," McElroy said. "We think we'll see a 10% return - sounds like a broken record - in the stock market for 2002. Bond yields will probably go higher from here, as will cash yields, and the yield curve will become flatter as the year progresses." McElroy said two of his portfolio managers are more positive on mid-cap stocks than large-cap stocks. "Mid-cap stocks, on a relative basis, did much better in 2001 compared to the S&P, although both were down for the year," McElroy said. He notes that mid-cap stocks, in general, are smaller and riskier companies. But, because there is more risk, there is more potential reward. "What we focus on is the risk and the return basis on those stocks. We've come from a period in which mid-caps did better than large-cap stocks, and we expect this dominance to continue."

The last word . . .

Two of the nation's largest companies - Enron and K-Mart - filed for bankruptcy within 10 days of each other, but McElroy believes the damage will be minimal for most investors. "The fallout from Enron is scattered," McElroy said. "Mostly, people are taking a closer look at companies with esoteric accounting methods. As far as Enron's impact on the energy sector, the biggest drag on energy is the declining price of oil." McElroy notes that at a recent price of $18 per barrel, big refiners are still making money. McElroy also doesn't see much of an effect on the overall retail sector due to the K-Mart bankruptcy. "It's a special situation, and the problem is more specific to K-Mart. The retail sector is doing quite well, in fact, much better than expected, especially in the fourth quarter," McElroy said.

Media Inquiries: Call Kay Brief, office: 504/568-1233 or 877/568-1233 (toll-free). She can put you in touch with James C. McElroy, Hibernia's chief investment officer, or with an investment or personal-finance expert in your area.

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