BY ANDREA HOLECEK
As the economy appears to be awakening from its three-year slumber, investors are becoming more optimistic about the stock market.
After reaching its historic peak of 11,722. on Jan. 14, 2000, the Dow dropped to a four-year low of 7,178 on Oct. 10, 2002. Friday, the stock market's Dow Jones Industrial Average closed at 9,471.5 down from its recent high of 9,609 but up 13.55 percent from its one year ago close. The NASDAQ, comprised of technology stocks, stood at 1,855.04 at the close Friday, up 38.90 percent from a 52-week low of 1,108.
"People are very aware that the market has been going up,'' said Mike Mulkey, Lansing-based investment representative for St. Louis-based Edward Jones Investments. "They're returning to the market but they're being more cautious on the types of stocks they're buying. They're looking for those with a proven earnings through a history of paying dividends.''
Don Nelson, first vice president of investments and head of the Nelson Group at Merrill Lynch, Merrillville, said one of the reasons investors are returning to the market is that alternative investments are relatively unattractive. Return on certificates of deposit, treasury bills, and bonds is low and the real estate market is overvalued.
"They're looking for an undervalued asset class,'' he said. "It (the stock market) is one of several investment choices and a fairly good alternative today. It does not appear to be overvalued.''
But investors are being more cautious than they were in the late 1990s, when they poured billions of dollars into the market, and they should be, Nelson said.
"Investors are much more careful today than when the market was running on its own momentum,'' he said.
Which is one reason he doesn't believe the DJIA will top 10,000 in 2003. Another reason is that Nelson thinks it's overdue for a correction.
"The economy is appreciating in the 7- to 10-percent range,'' Nelson said. "The majority of the move for this year has already occurred.''
Despite the hit taken by those holding technology stocks in 2000 and since, investors still are interested in that segment of the market.
"People still realize the future growth of the economy lies in technology,'' Edward Jones' Mulkey said. "They're buying names they know: Microsoft, Intel. Those that are recognizable versus the dotcoms that came and went. The survivors went through the worst times, and it's likely they'll continue to grow.''
Craig Holden, professor of business finance at Indiana University in Bloomington, agrees investors are being more selective in their stock selections.
"I think the over-enthusiasm based on wishful thinking is gone, and people are more realistic in the tech stocks they're investing in,'' Holden said. "They're looking at their track record, whether they're making a profit or have a realistic possibility of making a profit.''
But P. Raghavenda Rau, professor of finance at Purdue University's Krannert School of Management, said the market already is overvalued.
"Given all the problems in corporate governance systems and the magnitude of the tech shake-out, I would be surprised if the current climb reflects the fundamentals,'' said Rau espousing a conservative economist's view of the market.
"From the viewpoint of the general public, I do not think that investors are quite as optimistic as they were in the 1990s.''
However, Rau said it is difficult to predict what is going to happen in the short term.
"In the long-term, matters are easier,'' he said. "I have not changed my own investment strategy -- I invest in a stock market index and am in it for the long run, so even if the market falls back again, it does not matter for me in the short term.''
IU's Holden said people are investing because they perceive the end of the long, long recession'' and there are some indicators, though weak, of a recovery .
"It's not a sure thing, but it's not purely perception either,'' he said.
Andrea Holecek can be reached at email@example.com or (219) 933-3316.