THE STOCK MARKET STUMBLES : Q&A; : How Stocks Unraveled
The Dow Jones industrial average plunged 120.31 points to 2,943.20 on Friday, a 3.9% drop. Answers to some basic questions investors may have:
Q: Was there one single event that sparked Wall Street’s big selloff?
A: The decline started with biotechnology stocks on Wednesday, after the Food and Drug Administration dashed hopes for a quick approval of an AIDS vaccine under developmentby San Diego-based Immune Response Corp.
Q: Why should biotech stocks cause such a broad market decline?
A: Biotech stocks have been the market’s stars all year. Whenever one stock group leads the market for so long, an abrupt collapse in those stocks is almost certain to cause a broad market selloff.
Q: Did worries about the economy also help cause Friday’s plunge?
A: Yes. Those concerns underlie almost every market move nowadays. Because Wall Street hasn’t seen any real signs of economic growth in recent months--while many stocks have remained near their all-time highs--some investors clearly got antsy and decided to bail out when they saw others doing so.
Q: How much of the slide can be blamed on computerized program trading?
A: When selling panics hit, such computerized trading games can accelerate the plunge--as they did in the last hour Friday. But keep in mind that program trading doesn’t cause major market declines: Human investors have to turn bearish before the computers do.
Q: How severe was Friday’s selloff, compared to others in recent history?
A: Not very. It was the Dow’s fifth-worst point drop, but in percentage terms the Dow’s loss of 3.9% didn’t even make the top-20 worst days of all time.
Traders also noted Friday that NYSE volume was relatively low for such a major Dow drop. A total of 236 million shares changed hands. That suggested that stocks’ plunge was more a matter of buyers staying away than sellers flooding the market.
Q: What happened to smaller stocks, which have been the hottest stocks this year?
A: Because small stocks have moved up faster than blue-chip stocks this year, they also would be expected to fall faster in a selloff. Indeed, the NASDAQ index of 4,000 smaller stocks plunged 23.55 points to 531.29 Friday, a 4.2% loss. But that still leaves the index up 42% for the year to date.
Q: Does Friday’s decline indicate there’s something fundamentally wrong with the stock market?
A: On the contrary. “The healthiest market is a self-correcting one,” said a Beverly Hills investment adviser Friday. Stock prices in general had reached high levels: the average stock price for the major companies included in the Standard & Poor’s 500 index had reached 17 times underlying company earnings per share. Over the past six decades, the average price-earnings ratio has been 13.
Stocks sell above the average when investors are optimistic about future profits. Such optimism has ruled the market since the end of the Gulf War, overcoming still-abundant signs of economic weakness. Small investors, fleeing low interest on savings deposits, have poured money into stocks.
But on Friday, against a backdrop of more bleak economic news, the idea that stocks were overvalued took hold among professional investors.
Q: Did Friday’s decline eliminate the overvaluation or could prices go lower?
A: Lower. Even analysts who are bullish on the market accept that a “correction” could trim 7% to 10% from the market’s peak of 3,077.15 on the Dow. That would take the Dow to 2,769. But some corrections can cut a lot more from stock prices and last for quite a while. One optimistic note sounded Friday was that this decline did not appear to represent a turn to a new bear market.
Q: Is this then a buying opportunity, as was the case after the market crash of Oct. 19, 1987?
A: Be cautious. It would not be advisable to see this as a buying opportunity, say many pros. With the economy weak, and the outlook for company earnings darkening there is not much reason to buy stocks. Also, pension and trust-fund investors have chalked up good gains in 1991 and might well continue Monday to lock in their gains by selling stocks at this point.
Watchful waiting is advised, say analysts, who recommend watching the NASDAQ index of small stocks as an indicator of sentiment.
Meanwhile, ordinary investors took Friday’s market decline in stride. Fidelity Investments, the mutual fund outfit, reported that its phone lines were not jammed with callers.
A Dive at the End
Dow Jones industrial average on the quarter hour.
Friday’s close: 2,943.20
Down 120.31 points Source: Telerate
Rough Ride on Wall Street
A list of the dozen Orange County corporations hardest hit, on a percentage basis.
Closing Dollar % Name Price Loss Loss Viratek Inc. 11.75 -2.25 -16.1% SysteMed 5.88 -1.13 -16.0% US Facilities 13.25 -2.13 -13.9% Laser Precision 10.25 -1.38 -11.9% Rainbow Tech. 19.00 -2.25 -10.6% Varco Intl. 6.38 -0.75 -9.7% ICN Biomed. 7.00 -0.75 -9.5% ICN Pharm. 14.38 -1.50 -9.7% Helionetics 6.25 -0.63 -9.2% SPI Pharm. 25.38 -2.50 -9.0% Clothestime 7.25 -0.63 -8.0% TriCare 15.00 -1.25 7.7%
