Are Stock Sales a Blip or Start of a Downturn?
First the high-tech stocks, then the home builders, then the brokerages, then the deep-discount retailers.
One by one over the past two weeks, some of the stock groups that were Wall Street’s favorites in the first quarter have been badly beaten up. The severity of those selloffs raises a big question: Is this the start of a broad market plunge--or the last blowout before a major new rally?
Computer chip giant Intel, for example, has fallen from $63.75 the week of March 23 to $54.75 at Friday’s close, a 14% drop.
Home builder Centex Corp. has dropped from $53.125 to $47.75 in the same period, off 10%; brokerage giant Merrill Lynch fell from $58.875 to $51, a 13% loss; and off-price clothing retailer Fifty-Off Stores slid from $27.75 to $20.25, a 27% plunge.
For the most part, the stocks were hit not because of any news, but on investors’ perceptions that there might be trouble ahead--maybe computer and housing sales will slow, maybe there will be less business for brokerages, maybe there will be more competition in deep-discount retailing.
It isn’t unusual for stocks to go up and down on innuendo, of course. But the speed with which these stocks have moved has surprised even some veteran traders.
Jon Groveman, president of brokerage Ladenburg, Thalmann & Co. in New York, figures that the “spikey” nature of the market betrays a restlessness on the part of investors that is ultimately unhealthy. Watch out for a bigger selloff soon, he warns.
“A lot of these stocks are really being victimized by their own success,” Groveman says. “They’re going down the way they went up--in a straight line.”
The market has demonstrated in previous mega-rallies and crashes alike that everyone can’t get in or out the door at the same time, Groveman notes. Yet that’s exactly the dangerous mind-set of many skittish investors today. When the selling starts in an individual stock, everybody assumes that the other guy “knows something.”
Some analysts say investors have become frustrated because they’ve already over-analyzed every major event that could potentially affect stocks in the next few months. “We’ve talked about the recession to death, we’ve talked about the recovery to death and we’ve talked about the (November) election to death,” says Len Hefter, over-the-counter stock trader at Jefferies & Co. in Dallas.
Friday’s report of a weak job market in March wasn’t a surprise--everyone accepts that the economy will be slow in regaining strength. All that’s left to do now, Hefter says, is to wait--for further signals on the economy and for first-quarter corporate earnings reports. Problems is, in a vacuum objects fall freely, and that appears to be the case with a lot of stocks in this news vacuum.
What makes the market even more frustrating for many players is that they know that their portfolios are faring worse than what the ubiquitous Dow Jones industrial average would suggest. The Dow, at 3,249.11 Friday, gained 17.67 points, or 0.5%, last week. In contrast, the New York Stock Exchange composite index lost 0.6% for the week.
That kind of disparity between the 30-stock Dow index and the broader market indexes has been going on much of this year. Pumped-up performances by a handful of blue chip stocks such as Disney and Sears have kept the Dow near its all-time high, while many other stocks have suffered steep declines after the big late-December/early-January rally.
Merrill Lynch & Co. analyst Richard McCabe says 28% of 4,000 stocks that he tracks plunged 20% or more between January and the end of March.
The good news is, that means that 72% of those stocks haven’t fallen 20%. But the broad-market trend is unmistakably negative. On Friday, for example, only 18 NYSE stocks hit 1992 highs, while 144 hit 1992 lows.
Whenever the Dow and the broad market part ways like this for an extended period, one of two things can happen: The Dow gives up and falls with the rest of the pack, or the rest of the pack rallies to catch up with the Dow.
McCabe says the latest selloff may be the last gasp of the bears. The market is becoming “oversold,” he says, and the level of pessimism as measured by stock “put” and “call” contract volume suggests a bottom soon. Because many more investors are using put contracts (which are a bet on a sliding market) than calls (a bet on a rising market), McCabe figures that the market is sure to disappoint the bearish majority.
That’s how things played out in December, McCabe notes. Early in December, the broad market became progressively weaker, while the Dow held up. Just as bearishness reached a peak in late December, stocks suddenly rocketed, helped by another cut in interest rates by the Federal Reserve.
The Fed may not cut rates again soon, McCabe admits, but he notes that interest rates now are falling of their own volition. That should be a major plus for stocks, he says.
For example, the discount rate on 3-month Treasury bills tumbled to 3.95% by Friday from 4.08% earlier in the week, as more investors perceived that any economic recovery this spring will be slow at best. The T-bill rate had been rising since late January on fears of a too-fast recovery, but most of those worries have dissipated.
Beating the Market Blahs: Stock pros say the smartest strategy now is to avoid becoming stymied by the market’s twists and turns. If you’re waiting for the Dow to drop 200 points so you can buy stocks more cheaply, the surprise may be that the stocks you really want already have gotten cheap. The Dow may never get there.
So ignore the Dow and the other indexes, and make up a list of the stocks that you believe have great potential to do well later this year and into 1993. (Remember, an economic recovery is almost certainly taking shape, if slowly.) Then decide how much you’re willing to pay for those stocks relative to their earnings.
You’ll get more help in determining which stocks represent good value and which don’t as first-quarter earnings begin to roll out over the next few weeks. Earnings are expected to improve sharply versus a year ago in some industries that benefit early when the economy turns up--for example, truckers, building-materials producers and railroads.
Meanwhile, earnings will still be down in many industries, from oil to grocery chains to machinery makers, which typically lag an economic upturn.
Don’t expect stocks to move much in response to earnings. Wall Street typically gets worked up about earnings reports well in advance, then treats the announcements as anti-climactic--at least if they come in as expected.
What will be important in first-quarter earnings reports is whether the trend is in the right direction and whether a company signals that it has reason to expect business to improve in the months ahead.
If, based on improving earnings, a stock is already in what you’d consider a fair price range, it may be time to start buying. If the market drops further and the stock gets even cheaper--even though there’s no change in the company’s outlook--you should be willing to buy more.
This is pretty basic stuff, but it’s worth noting because so many investors allow their emotions to overpower logic and reason, especially during market selloffs. How many times have you looked back and said, “That stock was so cheap a few months ago--if only I’d bought it then!”
The same exercise goes for stock mutual fund investors. If you had looked at a fund two months ago, and today its share price is 5% lower, don’t assume that the fund must have peaked for all time.
Some stock funds, especially those that own high-priced “growth” stocks, may have further to fall this year as the stock market becomes more value-conscious and less speculative.
But if your time horizon extends out five to 10 years, many growth funds are likely to do well in the long run. You’ll never know the exact bottom point at which to buy, so the best you can do is buy in regularly as prices go down. It’s worth remembering that fortunes are made in stocks when you buy things nobody else wants--not when you’re buying with everyone else.
First-Quarter Earnings: The Good and the Bad
First-quarter corporate earnings reports will start rolling out this week. Here are examples of industries that are expected to report sharply higher--and lower--income compared to a year earlier. The estimates are consensus expectations of Wall Street analysts.
Should Be Up
Est. 1st qtr. Industry net growth Truckers +170% Home builders +165% Building materials +135% Auto parts (orig. equip.) +102% Computer services/software +46% Semiconductors +41% Railroads +40% Specialty retailers +30% Cosmetics +26% Drugs +17%
Should Be Down
Est. 1st qtr. Industry net growth Domestic oil -52% International oil -44% Metals -44% Chemicals -40% Computer systems -12% Grocery chains -11% Paper/forest products -10% Property/casualty insurers -7% Hospital management -4% Machinery (diversified) -2%
Source: Prudential Securities (using IBES Inc. data)
