Has the Bear Started to Growl? : Rising Gloom On Wall St. Raises Risk of Major Selloff

Stock prices plunged Tuesday, reflecting a deepening pessimism that could herald the most severe market pullback since 1990.

The Dow Jones industrial average tumbled 63.33 points to 3,699.02, marking its lowest close since Dec. 1 of last year after the sixth losing session of the last seven.

The damage was far worse in the broad market, where losing stocks outnumbered winners by a stunning 20 to 3 on the New York Stock Exchange.

Behind the numbers is a spreading gloom on Wall Street that threatens to trigger a cascade of selling, reflecting investors’ pent-up worries about rising interest rates and inflation, the Clinton Administration’s political quagmire and a host of overseas problems.


“It’s starting to snowball,” warns James Stack, publisher of the InvesTech market newsletter in Whitefish, Mont.

While stock pros have long been predicting a classic market “correction"--a fast decline in stock prices of 10% to 15%, followed by a rally to new highs--the debate has already moved beyond that level. Now, many Wall Streeters suggest that stocks could be in the throes of a true bear market that could hack 20%, 30% or more from prices and keep them down for a surprisingly long period.

Though the notion of a bear market may seem absurd with the economy finally in a strong upturn, it is precisely that economic strength that has tripped markets this year.

Since the Federal Reserve Board tightened credit in February for the first time in five years, investors have begun to see long-forgotten ghosts in every market corner: the ghost of inflation (from the 1970s), the ghost of soaring interest rates (from the early 1980s) and the ghost of market crashes (from 1987).

Ghosts scare people, even people who ought to know better. And the greatest risk to the stock market today is that there are more players in it--institutional and individual--than ever before. It may require only that a relatively small percentage of them become afraid, and sell, to take stock prices well beyond the usual 10%-to-15% correction parameters, some analysts contend.

In part, the market’s sharply rising fear level today is the penalty for the general lack of fear over the past three years. As interest rates dropped gradually to 20-year, then 30-year lows between 1990 and 1993, so much money moved into stocks--betting on the future--that the broad market was pushed inexorably higher. The lack of volatility in stock prices lulled many investors into believing the market was a low-risk bet.

But this year, the Dow industrials have been ratcheting painfully downward since late January, just before the Fed’s initial boost in short-term interest rates. The Dow now is off 7% from its peak. Smaller stocks, which had rallied even as the Dow languished earlier this month, have collapsed this week.

Yet until now, many Wall Street pros have remained stoically bullish, maintaining that interest rate and inflation fears were overdone.


On Tuesday, more of those bulls began to raise red flags, triggering a new wave of selling:

* Smith Barney Shearson, the nation’s biggest retail brokerage, told clients to trim stock and bond holdings and hold more of their assets in cash. The firm had been recommending a portfolio of 55% stocks, 30% bonds and 15% cash. It changed the mix to 50% stocks, 25% bonds and 25% cash.

Marshall Acuff, chief investment strategist at Smith Barney, said his firm’s caution reflects a higher level of risk in the market, as short-term interest rates have moved up and more investors look to take profits in stocks and bonds.

Acuff says he’s still in the “correction” camp, projecting, at worst, a 15% average drop in stock prices, from peak to bottom, in the near term. With the Dow already down 7%, the decline could be half over, he notes.


* Dean Witter Reynolds, another brokerage with a huge individual-investor clientele, made an even more dramatic shift in its recommended portfolio late Tuesday. The firm suggested that investors reduce stocks from 60% of assets to 50% and bonds from 35% to 25%, and raise cash to 25% from 5%.

Like Smith Barney’s Acuff, Dean Witter investment strategist William Dodge professes to be turning cautious, not outright bearish. “The tendency (on Wall Street) will be to make this look like the beginning of the end” of stocks’ bull market, Dodge says. He doesn’t see it.

After another 6%-to-8% average decline in stock prices, Dodge expects the market to move higher over the next 12 to 18 months, tracking the expanding economy and rising corporate profits.

He could be right, of course. If interest rates stabilize and economic growth continues at a moderate pace, in theory there should be hordes of investors waiting to buy stocks at cheaper prices.


But note: What the Smith Barneys and the Dean Witters are counting on is that enough buyers will surface at the traditional market correction parameters to turn the stock market around before the decline becomes an avalanche.

Yet as many foreign stocks have plunged this year, the result has been much less interest in them, not more. Ditto for long-term bonds. So it’s hard to understand why investors would treat plummeting U.S. stocks differently.

Moreover, stock indexes this week have fallen below key “technical” levels, triggering “sell” signals for short-term traders. Both the Standard & Poor’s 500 index and the Nasdaq composite, for example, have dropped below their 200-day moving averages, important price levels at which buyers are supposed to emerge--but haven’t so far.

Also, widely followed investor advisory services, such as the Huntington Beach-based Telephone Switch Newsletter, have yet to issue “sell” signals but will be forced to do so if the market declines by a couple more percentage points.


In short, even for long-term investors eager to buy, the smarter strategy now may be to stay sidelined and let the market shake itself out. Since 1990, many people have only known how to buy stocks. They’ve never had good reason to sell. Suddenly, they’re finding reasons, and they’re acting on them. It would be nice to believe that the market can neatly right itself within the bounds of a 10%-to-15% decline, but rarely do stocks accommodate the masses so readily.

The Damage So Far

How some major stocks and indexes have tumbled in the current market selloff, versus their recent highs.

52-week Tues. Pct. drop Stock high close from high Sears 60 1/8 43 1/4 -28.1% J.P. Morgan 79 3/8 62 1/8 -21.7 AT&T; 65 51 3/4 -20.4 Inland Steel 37 1/8 31 1/8 -16.2 3M Co. 117 98 3/8 -15.9 General Motors 65 3/8 56 -14.3 Disney 48 5/8 43 1/8 -11.3 Intel 74 1/4 66 1/4 -10.8 Deere 90 7/8 81 3/4 -10.0 Motorola 109 3/4 100 3/8 -8.5 Dow industrials 3,978 3,699 -7.0% Nasdaq compos. 803.93 755.29 -6.1 S&P; 500 482.00 452.48 -6.1


A Wicked Day for Stocks

How key market indexes plunged on Tuesday, and their declines so far from their all-time highs.

Tues. close Pct. Pct. drop Index and change chng. from peak Nasdaq composite 755.29, -17.21 -2.2% -6.1% Dow utilities 201.23, -4.21 -2.1 -21.5 Dow transports 1,675.36, -35.53 -2.1 -10.0 Russell 2,000 257.04, -5.47 -2.1 -5.2 Dow industrials 3,699.02, -63.33 -1.7 -7.0 NYSE composite 251.30, -4.20 -1.6 -6.1 S&P; 500 452.48, -7.52 -1.6 -6.1