What a Week: The Santa Claus Rally That Wasn't

Stocks post a solid rise but fail to impress those who expected a pre-Christmas blowout.
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It was a good week for the stock market, but not the barn-burner that some people were looking for. The cadre of investors who thought the market was poised to hit new post-September highs were left hanging.


Dow Jones Industrial Average

rose 2.3% while the benchmark

S&P 500

tacked on 1.9%. The tech-heavy Nasdaq was down 0.4% for the week but closed Friday at 1945.78, up 27.24, or 1.42%. The Dow closed Friday at 10,035.34, up 50.16 points, or 0.5%.

The Nasdaq's underperformance was really the market story of the week. There were a number of factors at play there.

To begin with, a number of tech-related outfits issued downbeat forecasts. Contract electronics manufacturers




Jabil Circuit

(JBL) - Get Report

both reported disappointing quarterly results and offered grim near-term outlooks. Serial warner



did what it does best, guiding down expectations for the fifth time this year. Network-equipment maker


(JNPR) - Get Report

said its outlook wasn't so rosy.

The easy thing to say here is that all the warnings have made investors question how quickly the recovery in tech is going to be. Clearly there is some truth in that. The Nasdaq is 15% above its Sept. 10 close, and during that time the forward price-to-earnings ratio on the S&P tech sector has risen to 57 from 40. Within those moves is a forecast for technology companies to see a nice pickup in growth.

There may be more going on than a mere re-evaluation of tech's prospects, however. Nice as the move in these stocks has been, nobody can forget the sector's recent past, how it led investors along a primrose path that ended in wrack and ruin. But thanks to the big run, where it outperformed the rest of the market, tech now carries a much larger weight in a lot of portfolios. Now that year-end has come, some investors appear to be doing a little readjusting, either for peace of mind or perhaps, in the case of some fund managers, because they don't want year-end statments to make them look like tech-investing cowboys.

The Road Less Traveled

And what do you buy with the money you raise from selling tech? If you're having doubts about the shape of the recovery, you hedge by putting it someplace like bonds. And as it turns out, bonds recouped some of their recent losses this week. If you continue to believe the economic and earnings recovery will be robust, however, you put that money into blue-chip stocks that will benefit from recovery, things like



General Electric






Of course, for some people this just amounts to moving around deck chairs on the Titanic.

"The average investor is wildly bullish," complains Josephthal chief investment strategist Larry Rice. "Everyone is looking for a better year in '02. Everyone is looking for an uptick in the economy. Where's my surprise going to be next year? Usually when the crowd goes one way, you want to go the other.

"Anyway, happy holidays."

You too, Larry. You too.