Stock ‘Correction’ Already Here for Some High Fliers
You say you’re waiting for a “correction” in the stock market, so you can jump in? Welcome to the correction.
A number of well-known growth stocks have been sliding for the past few trading sessions, after having led Wall Street’s surge for much of this year.
The growth-stock selloff has pulled down such 1995 high fliers as drug giant Eli Lilly, which at $70.125 now is off 11.7% from its April high of $79.375; Coca-Cola, which is now down 7.1% from its recent peak; and retailer Home Depot, which fell $2.25 to $41.25 on Tuesday after reporting quarterly earnings up 10%, less than expected.
Those stock declines might seem minor at first glance, but consider this: For the Dow Jones industrial average to fall as much as Coca-Cola has fallen, the blue-chip index would have to lose 315 points from its near-record close of 4,435.05 on Tuesday. Obviously, a Dow decline of that size would unnerve some investors, though others would undoubtedly look upon it as an opportunity.
What ails the big growth stocks? And is their slide a good or bad sign for the broad market? The turn in many of the stocks coincided last week with the rebound in the value of the dollar.
The dollar’s weakness earlier this year helped pump up multinational growth stocks by enhancing the potential foreign contribution to their (usually) predictably strong earnings outlook. When the dollar began to rise last week, some investors automatically assumed that if a weak dollar was good for the companies’ earnings outlook, a rising dollar would have to be bad.
Though the dollar’s actual effects on earnings of the typical multinational company are far less black or white than the stocks’ action would suggest, the U.S. currency’s turnaround provided a convenient excuse for profit taking.
*
At the same time, other sectors of the stock market have begun to look more attractive to Wall Street in recent weeks. As belief in a “soft landing” for the decelerating U.S. economy has become almost universal, many investors have flocked back to industrial stocks that, at least in theory, would benefit from a slower, stretched-out economic expansion.
So as Coke’s shares have slumped, aluminum titan Alcoa’s shares have leaped from $40.75 in April to $47 now.
A continuing bond market rally also has fueled a fresh rally in interest-rate-sensitive stocks such as banks, which typically post better earnings growth in times of falling or stable rates.
What is remarkable about this “rotation” among stock groups is that it has been accomplished without any apparent damage to stock indexes such as the Dow or the Standard & Poor’s 500, which continue to hit record highs day after day.
Some analysts think the broad market’s advance, even as key individual stocks get hammered, is a healthy sign. So far, says analyst Jerry Appel at Systems & Forecasts in Great Neck, N.Y., “this shows the sellers can’t take down the whole market.”
David Bostian, strategist at Herzog Heine Geduld in New York, says that “bull markets that rotate go on for much longer than markets with narrow leadership” of only a few rising stocks.
Put another way, if investors continue to look around for another stock to buy even as they sell what they have, that’s obviously more bullish for the market than if the sellers choose to keep their profits in cash on the sidelines.
But some Wall Streeters say that the breakdown of the growth stocks could be an early warning that the market overall is running out of gas. The idea of rotating corrections within an ever-advancing bull market is a comforting thought, but it’s just “another rationalization for people who don’t want to believe there will be a real correction” in stocks, argues Ray Devoe, strategist at brokerage Legg Mason in New York.
“Every time you have a line-drive bull market” like this year’s, Devoe says, people begin to believe it can go on forever. It doesn’t take brilliance to realize the risk grows with each Dow high, he says.
Ricky Harrington, technical market analyst at brokerage Interstate / Johnson Lane in Charlotte, N.C., says the abrupt shift from growth stocks to industrial issues is “a symptom of market participants jumping from one [economic] scenario to another. . . . Such quick mood changes usually come late in the bull market cycle,” he says.
Bostian figures the industrial rally can continue until more investors begin to question whether the economy’s deceleration will indeed turn out to be a soft landing or whether business will slow down so substantially that industrial companies’ earnings growth will be threatened.
He figures those doubts will begin to creep into the market in coming months. If that happens, will investors run back to the traditional growth stocks? There’s precedent for that, of course, which would make the current setback in those stocks a gift for investors who have been patient this year. But growth-stock buyers today also have to believe that the economy still can avoid outright recession. However dependable their earnings growth may be, even the classic growth stocks won’t escape savaging if Wall Street senses the economy is headed for a tailspin.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Setback in Progress
While many investors wait for the broad market to pull back, some big growth stocks are already in the midst of such “corrections.”
‘95 ’95 Tues. Drop vs. Stock low high close high Home Depot 40 1/4 50 41 1/4 -17.5% Eli Lilly 62 1/2 79 3/8 70 1/8 -11.7% Wm. Wrigley 42 7/8 49 1/4 45 1/8 -8.4% Pfizer 74 1/2 90 3/4 83 3/8 -8.1% Coca-Cola 48 3/4 61 3/4 57 3/8 -7.1% Johnson & John. 53 5/8 67 5/8 63 1/2 -6.1% Proc. & Gamble 60 5/8 72 1/4 69 1/8 -4.3% Philip Morris 55 3/4 73 1/8 70 1/2 -3.6% Gillette 70 3/4 86 1/8 83 1/8 -3.5%
