The Question of Whether Mini-Crash Is Coming
The best thing you can say about the stock market lately is that it’s open only 6 1/2 hours a day--so investors have the other 17 1/2 hours to recover from the pain.
The last three weeks have been murder on pro and novice market players alike, as many stocks have faced the heaviest bouts of selling yet this year. The Dow Jones industrial average managed to rally 11.23 points Friday to close at 3,285.35, but the week’s loss still amounted to 69.01 points.
Since its June 1 peak of 3,413.21, the Dow is down 3.7%. In that same period, the index of all New York Stock Exchange issues has lost 3.5%, and the index of all NASDAQ issues has fallen 5.8%.
The surprise is that those numbers aren’t worse, given the growing list of investor concerns. There is, after all, Ross Perot’s presidential candidacy, the possibility of disappointing second-quarter corporate earnings, a so-so economic recovery that may be weakening, and the simple desire to take profits in whichever stocks still have them.
In fact, considering how lousy many investors feel, this question is making the rounds on Wall Street: If things are suddenly so bad, why hasn’t the market succumbed to one of its trademark mini-crashes--like the 120-point Dow drop of last Nov. 15?
“I’ve had those thoughts just recently,” admits Larry Rice, over-the-counter stock trading chief at Wedbush Morgan Securities in Los Angeles.
Big one-day selloffs have generally been cathartic for the market since 1987, washing out the sellers and priming the market for a new advance. Despite the post-’87 introduction of certain trading restrictions designed to slow crashes--such as the “collar” on computerized trading if the Dow drops 50 points--the fall last Nov. 15 showed that the restrictions have limited effect when people really feel like bailing out.
Is the market setting itself up for a mini-crash in the next few weeks? Many analysts doubt it.
“Crashes don’t come from people coming around to the realization that they feel bad,” says Alan Sachtleben, chief investment officer at money management firm American Capital in Houston. “Crashes tend to come from nasty surprises.”
The Nov. 15 fiasco, for example, stemmed from Congress’ sudden attempt to cap credit-card interest rates; a 70-point Dow drop last Aug. 19 followed the Soviet coup attempt.
Absent a shock like those, Sachtleben says, most investors are likely to continue viewing buy and sell considerations as stock-by-stock decisions.
And looking at the market stock by stock suggests that it’s already too late to sell many issues anyway, some Wall Streeters say. William Rothe, trader at brokerage Alex. Brown in Baltimore, notes that the market has been unforgiving this year of any industries that have failed to justify the optimism built into their share prices in 1991.
While stocks of auto makers, banks and mining companies have soared as the companies’ profits have improved with the economy, many other stock groups have plummeted as their earnings prospects have waned:
* In 52 of 87 industry groups tracked by brokerage Smith Barney, Harris Upham & Co., the average stock now is either flat or below its Dec. 31 price. By contrast, in 1991’s bull market only nine industry groups failed to show stock gains for the year.
* Perhaps even more striking is a tally by Richard McCabe, an analyst at Merrill Lynch & Co. in New York. A computer price check of 5,000 stocks shows that 59% have already fallen 20% or more from highs reached between Dec. 1 and March 31, McCabe says. Traditionally, a 20% decline in a stock would be considered a bona fide bear trend.
Alex. Brown’s Rothe figures that investors’ rough treatment of thousands of stocks this year has been a safety valve for the market as a whole: People have sold the issues that have disappointed them while holding on to plenty of other stocks. By blowing off at least some of the excess built up in last year’s wild bull market, “maybe that’s what keeps the whole market from crashing,” he says.
There is also the possibility that many investors who entered the stock market last year and this year truly are long-term investors, who aren’t fazed by Wall Street’s worry du jour . If the economy stalls this quarter, these folks may figure, it’ll heat up again next quarter; unless you can make a strong case that a new recession is imminent, long-term investors may see no reason to sell now.
Some analysts, however, warn that the market’s tortured trading this year is the result of a mood shift that even very long-term investors can’t ignore: The return of value as a preeminent consideration in deciding what to own.
Simply put, that means refusing to pay 30 to 40 times earnings per share for a stock that history indicates is only worth, say, 15 times earnings. It means being patient, and waiting to buy until bargains are apparent, rather than buying just because you can’t stand earning 3.5% in a money fund.
Ken Heebner, a veteran money manager at CGM mutual funds in Boston, believes that the market’s message this year is that time-honored value rules will be enforced--if not necessarily today with a particular stock, then soon.
He views 1992 as the aftermath of a wild party, meaning 1991’s bull market. After a party, people sober up. The decline of high-flying health care, retail and consumer products stocks this year is just an early warning, Heebner says. “A lot of companies that were considered growth stocks really were not,” he says.
Yet looking at stocks overall, with many continuing to hover near record highs relative to their earnings potential, Heebner says flatly, “I think the market is still way too high.”
Geraldine Weiss, publisher of the Investment Quality Trends newsletter in La Jolla and another long-time market observer, agrees. Ross Perot, fear of a slowing economy, fear of higher interest rates--all of these are convenient excuses for the real problem, which is that investors know in their hearts that stocks ran up way too fast last year, Weiss says.
Noting that many stocks trade at historic highs not only compared to earnings but also compared to dividends and the underlying value of the companies’ assets, Weiss says: “When you see the market stretched to these extremes, you know it’s due to come down, because it always comes down from these levels.”
Unlike many of her peers, she isn’t sure a one-day crash of some magnitude can be ruled out. “Fair value” for the Dow index, Weiss says, would be 2,500. That’s a 24% drop from here.
Another cut in interest rates by the Federal Reserve could delay the day of reckoning, she says. But with the presidential election only five months away, she figures that it won’t take very long for investors to begin throwing out any stock that appears overpriced, given the uncertain economic and political backdrop.
Her message to would-be stock buyers is: Wait. You’ll probably get it cheaper.
The Market’s Split Personality
Are we on the verge of a bear market? Some analysts would argue Wall Street has been in a bear phase all year, depending on the stocks you own. In contrast with many bull-market periods when virtually all stock groups advance, so far this year 52 of 87 industry groups tracked by brokerage Smith Barney are either flat or down.
It’s a Bull!
10 best stock groups
Year-to-date Group change Auto makers +56.6% Trucks/truck parts +25.5% Big banks (non-N.Y.C.) +25.1% Entertainment +21.5% Oil & gas drilling +19.5% Metals/mining +18.0% Big N.Y.C. banks +15.9% Restaurants +14.3% Electronic instruments +12.3% Building materials +11.1% S&P; 500 index -3.2%
It’s a Bear!
10 worst stock groups
Year-to-date Group change Alcoholic beverages -33.8% Household products -27.9% Specialty retailers -25.8% Housewares -25.2% Shoemakers -23.9% Health care (misc.) -23.3% Hospital management -22.7% Diversified health care -22.4% Commun. equip. -21.7% Medical products/supplies -20.5% S&P; 500 index -3.2%
Data through last Thursday.
Source: Smith Barney, Harris Upham & Co., using S&P; industry groups
