Stock prices tumbled Wednesday in the biggest one-day selloff in eight weeks, raising new fears that Wall Street’s bull market has ended and that more sharp declines are ahead.
The Dow Jones industrial average plunged 72.27 points to 3,626.75, its seventh decline in eight days, bringing its loss since March 18 to nearly 300 points.
In a dramatic reversal of the optimism that drove stocks to record highs in January, analysts say investors have become deeply troubled by rising interest rates, the White House’s spreading political problems and a growing number of foreign crises.
Moreover, the stock market’s long upward march since October, 1990--when the Dow bottomed at 2,365--has been so unblemished by significant declines that the severity of this one has taken professional and novice investors by surprise.
“We’re in a highly volatile and vulnerable environment,” warned Alan Ackerman, investment strategist at brokerage Reich & Co. in New York. The cascading selling of recent days, he said, reflects investors’ mounting fears that “he who hesitates is lost” in a plummeting market.
Trading volume surged to nearly 400 million shares on the New York Stock Exchange on Wednesday, and 20 stocks fell in price for every four that rose, a lopsided count rarely seen except in bear markets and in crisis-induced panics.
In the bond market, where surging interest rates have been the stock market’s chief worry this year, long-term Treasury bond yields reached 7.1%, up from 6.35% at year-end and the highest level since February, 1993.
For the average investor, financial markets’ stunning selloffs over the past two months have been difficult to reconcile with the extraordinarily good economic news. For the first time since the late 1980s, the economy appears to be in a sustained recovery. Companies are hiring again and corporate earnings are rising at a healthy pace.
Despite the economy’s improving tone, however, there have been relatively few signs of higher inflation--the troubling upward push in prices of goods and services that has historically accompanied strong recoveries.
In an attempt to keep the economy’s growth moderate and inflation at bay, the Federal Reserve Board has twice raised short-term interest rates by a quarter-point this year, once on Feb. 4 and again on March 23.
Although Wall Street pros had believed that most investors were prepared for the Fed rate hikes, the central bank’s moves now are being widely blamed for frightening investors and sparking the stock and bond markets’ accelerating declines. The Fed’s Feb. 4 rate increase triggered a 96-point drop in the Dow that day.
Many analysts say the problem is simply that investors had grown used to declining interest rates over the past three years and that the reversal of that long slide has had a worse-than-expected psychological effect on investors.
“The watershed was that the Fed put its stamp of approval on the fact that interest rates were going up again,” said Alfred Kugel, investment strategist at Stein Roe & Farnham in Chicago.
Other analysts, however, say the markets are responding not so much to the small rise in short-term interest rates as to the growing uncertainty about the Clinton Administration’s Whitewater affair and to a sudden burst of turmoil overseas: the assassination of Mexico’s probable future president, North Korea’s intransigence over the nuclear issue and the U.S.-Japan trade conflict.
When the world economy’s prospects look promising and political issues are few, investors are willing to pay relatively high prices for stocks, experts note. But as uncertainty about the future increases, investors naturally lower the prices they are willing to pay for stocks--and may begin trimming what they own.
“I believe the markets are just factoring in some political risk again, around the world,” Reich & Co.'s Ackerman said.
Stock markets have declined sharply in many countries this year, not just in the United States. Whereas the Dow industrial average now has slumped 8.8% from its all-time high, British stocks are down 9.5% this year; in Thailand, the average stock is down 26% year-to-date.
What is unclear is how much further stock prices will slide before buyers are willing to return in droves.
Because the New York Stock Exchange imposed so-called circuit breakers on the market after the 1987 crash, when the Dow plunged 508 points in one day, analysts believe that a crash of that type is unlikely. For example, when the Dow loses 50 points in one session, the NYSE automatically restricts some big investors’ ability to trade stocks via high-speed computers.
The effect of that circuit breaker has been to limit market volatility. But critics say that by artificially restraining selling, the NYSE guarantees that any market decline now will be stretched over a long period, gradually drawing out more sellers as investors see the market edge painfully lower day after day.
On Wall Street, some analysts who have long been predicting a classic market “correction"--a fast 10% to 15% pullback in prices, then a resumption of the bull market--now believe that U.S. stocks are vulnerable to a plunge of 20% or more from their highs. A drop of that magnitude would officially qualify as a bear market and could drag on for many months, if history is a guide.
In the last bear market, the Dow slumped from 3,000 to 2,365 between July and October of 1990. The 1973-74 bear market, one of the worst ever, lasted two years and cut 45% from the Dow.
“I’m 99% sure (this is) a bear market, not a normal correction,” said Stan Weinstein, a veteran market analyst who writes a newsletter called the Professional Tape Reader in Hollywood, Fla.
Weinstein and others who expect heavier selling in part cite the market’s lack of meaningful declines over the past three years. Stocks’ 42-month climb has pulled in millions of new investors, many of whom may now feel compelled to sell some or all of their holdings as they see Wall Street sentiment turning bearish, some pros fear.
Also, the higher short-term interest rates engineered by the Fed will provide new competition for stocks in the form of higher yields on safe bank CDs, analysts note.
So far, stock and bond mutual funds--the investment of choice for 38 million Americans--report relatively little selling by their clients.
Still, the fund companies acknowledge that, as foreign stock funds have plunged in price this year, investors have begun to take money away from those funds, though in small amounts. The worry now is that investors also will begin to pull money out of U.S. stock funds as their prices erode and people fear bigger losses ahead.
“The big question is, will we see panic selling by less sophisticated investors who have been told that mutual funds go up 10% a year?” said Arnold Kaufman, editor of Standard & Poor’s Outlook investment newsletter.
He also noted that, because so many more Americans own stocks today than did five years ago, a bear market today could eventually depress the economy by leaving many investors feeling poorer as their investments lose value.
But some money managers argue that the bear scenario is vastly overstated.
Robert Rodriguez, manager of the FPA Capital stock fund in West Los Angeles, said he was buying stocks Wednesday as the market dove.
“I think this is just a hiccup,” Rodriguez said. Taking a longer-term view, he expects interest rates to settle down soon and the economy and corporate profits to continue growing, bringing investors back to stocks. Even at higher yields of perhaps 4%, short-term CDs will provide little incentive for many investors to run wholesale back to banks, he said.
Noting that many blue-chip stocks have already plunged more than 15% this year, Rodriguez said, “If you wait for ‘the market’ to bottom, a lot of the stocks you want to buy will have already bottomed” and begun moving up again.
Sheldon Jacobs, editor of the No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y., said he is reminding worried clients to think about why they bought stocks in the first place. If they are long-term investors, he said, they should realize that bear markets come and go, but that stocks inevitably move higher in the long run if the economy continues to grow.
“There’s only one sure way to lose money in the stock market, and that’s to buy high and sell low,” Jacobs said.
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