Published July 2002

Piper Jaffray official sees summertime blues, fall turnaround for investors

By Eric Fetters
Herald Business Writer

Terry Sandven thinks investors won’t have much to smile about during their summer vacations, but they may be in better moods by the time Thanksgiving comes around.

Sandven, Director of Portfolio Strategy at U.S. Bancorp Piper Jaffray’s headquarters in Minneapolis, recently shared his predictions as the keynote speaker at an investors forum in Everett.

He is cautiously optimistic about the investment markets when looking six months ahead and beyond.

“I happen to think there are some opportunities, given the context that you can give yourself 12 to 18 months,” he said.

His comments came during a period that saw heavy losses on the market, and some analysts wonder if a turnaround really is on the way.

Others, including Sandven, think the market is just bottoming out before it mounts a recovery.

Sandven cites several reasons to be hopeful for better times. First among them: The Standard & Poor’s 500 index has not declined for three years in a row since 1941. The current market slump has lasted two years, so statistically, it should be near its end.

Also, it appears that companies’ earnings estimates for 2002 are stabilizing.

“To get confidence in the market, you need to have earnings,” he said.

An improvement in earnings may not be evident in second-quarter results, which will come out in July and August. So he sees a bad mood continuing on Wall Street through those months.

Even if the second-quarter earnings aren’t so bad, the dog days of summer nearly always are among the worst for the stock markets. Sandven points to a research chart showing the average monthly performance for the S&P 500 since 1985. August and September are the only months of the year when the average performance dips into negative numbers.

This year, those months also may bring an end to the streak of interest rate reductions, as the Federal Reserve Board is expected to meet then.

“The jury is still out on when we may see the first uptick in rates. Some suggest about August or September, and we’re certainly in that camp,” Sandven said.

Additionally, September will mark the one-year anniversary of the terrorist attacks in New York and Washington, D.C., an event that won’t help boost investors’ moods.

So wait until October, when third-quarter earnings start coming out. That’s when the good news could finally start pushing stock prices in the right direction, Sandven said.

Looking at specific industries in which he sees investment opportunities, Sandven holds a generally favorable outlook for companies in the manufacturing, financial and energy sectors.

He also is high on many health care and pharmaceutical stocks, despite the sector’s generally poor performance of late.

“If you have a Bristol-Meyers or an Eli Lily and give yourself two years, I’m optimistic you can make money,” he said.

While he thinks many biotechnology companies have a good future, especially as they pair up with bigger pharmaceutical firms, he admits that sector still is too risky for many investors.

As for the battered high-tech sector, Sandven said he still has concerns. A flock of companies bought new computer equipment in 1999 to be ready for potential Y2K glitches, and many are not ready to buy new equipment again.

That trend is compounded by the lack of a new “killer application” — a new computer feature that compels businesses and consumers to upgrade as soon as possible.

On the other hand, computer analysts are predicting innovations in 2003 could spur more buying, and Sandven and others think the tech sector can’t go much lower before starting to recover.

As the U.S. dollar is beginning to weaken overseas, however, Sandven sees many short-term gains lying beyond the nation’s borders.

“If you were to ask me where the greatest opportunity lies in the next year or so, I’d say the international market,” he said.

But he also cautions investors to realize that sky-high returns seen in the late 1990s probably are not returning anytime soon.

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