Trying to make sense out of what's happened to financial markets over the past month? This may help you get your bearings.
The Mideast situation has dramatically changed the outlook for stocks, bonds, precious metals and many other investments. But even before the invasion Aug. 2, markets were in flux.
The inability of the Dow Jones industrial average to close above 3,000 on July 16 and 17 was a blow to optimism--not just regarding stocks but also the economy as a whole. Investors sensed something was wrong.
What follows is a rundown of what's happened in key markets since July 16, and the outlook:
* STOCKS: The Dow average has lost 9.4% of its value since the July 16 peak. The over-the-counter market, home of most small stocks, has fared worse, falling 13.1%. Those are averages . Many stocks have lost 20%, 30% or more.
Analysts say it's important for investors to remember that the plunge wasn't brought on solely by fears of a Mideast war and soaring oil prices. The decline started two weeks before the Iraqi invasion, sparked by disappointment over corporate profits and worries that a slowing economy would crimp profits even more.
Last week, some investors jumped into many beaten-down growth stocks that had been favorites before the plunge. But the rallies were short-lived, and the market sold off again Friday. "Stocks aren't able to hold their gains," warns Suresh Bhirud, investment strategist at Oppenheimer & Co. in New York.
The bargain hunters, Bhirud says, "are thinking back to previous times when stocks dropped about 10% and then went on to new highs." But if the economy is nearing recession--which seems even more likely than before, given the Mideast crisis--it may be far too early to worry about missing bargains in the market, many analysts say.
True investors should also avoid being influenced by stocks' day-to-day gyrations because they are mostly the work of short-term traders. "The public is on the sidelines, and they're very timid," says Larry Rice, manager of OTC trading at Wedbush Morgan Securities in Los Angeles. Smart investors know that even if the Mideast situation is solved, the market must still face the prospect of a sinking economy. Timidity may be the wisest stance.
* BONDS: Long-term interest rates have jumped since mid-July. The 30-year Treasury bond yield is at 8.79%, up from 8.45% on July 16. Investors might be tempted to think that 8.79% is a great rate to lock in now. After all, won't rates drop as the economy slows?
The answer is that they should. But the decline will be gradual, because counterbalancing the effects of a weaker economy will be the same factors that sent long-term rates up to current levels, says Gary Schlossberg, economist at Wells Fargo Bank in San Francisco: inflation concerns stemming from higher oil prices, huge government borrowing needs and high overseas rates.
He sees the 30-year bond yield falling only gradually, to between 8% and 8.25% by year-end.
But Jerry Jordan, economist at First Interstate Bank in Los Angeles, cautions that potential bond buyers ought to wait and see how the Mideast crisis shakes out. If war erupts, and oil prices rocket again, long-term bond yields will soar. To buy now, "You have to be convinced that this won't end in a major military clash," he says.
* CASH: So-called cash investments, such as money-market mutual funds and short-term bank CDs, are clear favorites right now. Investors pumped $6 billion into money funds alone last week as they fled stocks and bonds.
But the safe haven of cash is paying less than it did four weeks ago, and yields will almost certainly keep dropping in a slow economy, analysts say.
The average money fund yield has fallen from 7.65% on July 16 to 7.5%--the lowest since October, 1988. The drop is a direct result of the Federal Reserve's decision to ease short-term rates on July 13, says Martha Witterodt, editor of IBC/Donoghue's Money Letter.
Many experts see the Fed easing again soon. By the fourth quarter, First Interstate's Jordan thinks that three-month Treasury bill rates could be below 7%, versus 7.38% now.
So you'll be earning less to stay safe. But it beats losing money.
* METALS: Gold is up 9.2% since July 16. Silver is lagging, up only 2.5%. But both really came alive Friday, as gold jumped $11.10 an ounce to $396.90 and silver leaped 11.2 cents to $4.97.
Is it time to buy? Here's the one answer no one would argue with: Think of precious metals as an insurance policy. Every investor should own a little gold--maybe 2.5% to 5% of your total portfolio. If the Mideast flares into a huge conflict, gold may be the only investment that holds its value.
WHERE THINGS STAND
How the turbulence in the Mideast--and general economic worries--have affected financial markets since July 16, when the Dow Jones industrial average peaked.
U.S. STOCKS/FOREIGN STOCKS
Pct. change, Index Year-end '89 July 16 Friday July 16-Friday S&P; 500 353.40 368.95 335.54 -9.1% Wilshire 5,000 3,419.98 3,518.32 3,193.75 -9.2% Dow industrials 2,753.20 2,999.75 2,716.58 -9.4% NASDAQ OTC composite 454.82 469.60 408.03 -13.1% Britain: FTSE 100 2,422.70 2,406.50 2,233.80 -7.1% Germany: DAX 1,790.37 1,931.86 1,749.34 -9.4% Japan: Nikkei 38,915.90 33,021.73 27,329.55 -17.2%
Point change, Investment Year-end '89 July 16 Friday July 16-Friday 30-year T-bond yield 7.97% 8.45% 8.79% +0.34 10-year T-note yield 7.93% 8.44% 8.66% +0.22 Money market fund average 7.87% 7.65% 7.50% -0.15 3-month T-bill discount 7.58% 7.62% 7.38% -0.24
Pct. change, Investment Year-end '89 July 16 Friday July 16-Friday Oil (N.Y. Merc, barrel) $21.82 $18.67 $26.23 +40.5% Gold (Comex, ounce) 402.50 363.30 396.90 +9.2% Silver (Comex, ounce) 5.21 4.85 4.97 +2.5%
STOCK GROUP WINNERS/LOSERS
Best- and worst-performing stock industry groups from July 16 (the market peak) through last Thursday's close.
THE BEST Group: Change Oil/gas drilling: +8.5% Oil well equipment: +7.7% Gold mining: +5.4% Domestic oil: +4.6% International oil: +4.1% Coal: +2.0% Natural gas: unch. Telephone utilities: -1.5% Electric utils.: -1.5% Aluminum: -3.8%
THE WORST Group: Change Airlines: -22.1% Electronic instruments: -21.9% Hotels/motels: -21.4% Semiconductors: -19.8% Housewares: -18.9% Personal loans: -18.0% Leisure time: -17.8% Restaurants: -17.4% Major banks (non-NYC): -17.0% Specialty retailers: -16.9%
Source: Smith Barney, Harris Upham & Co., using S&P; indexes