Q & A : What Do Investors Do When the Stock Market Gets Rocky?

Was Wednesday’s stock selloff, during which the Dow Jones industrial average lost 57.41 points after dropping 50.01 points the day before, a signal that the long and nearly relentless climb in stock prices is over?

If so, what’s an investor to do? Some questions and answers.

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Q: Why the decline?

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A: Several things happened, but none were particularly horrible. Some technology companies--most notably Intel Corp.--came out with earnings that were up, but a touch shy of what analysts had expected. Also, investor sentiment figures were released, showing that 59% of those polled were optimistic about stock market prospects. And in the perverse world of investing, that’s a bad sign.

Finally, Alan Greenspan, chairman of the Federal Reserve Board, said the economy appears to be in fairly good shape--a statement that investors took to mean he probably wouldn’t be cutting interest rates again any time soon.

Couple that with the normal nervousness of portfolio managers who know that what goes up sometimes comes down--and stocks are way up this year--and you get panic, says Eugene E. Peroni Jr., senior vice president of Janney Montgomery Scott in Philadelphia.

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Q: Are stocks likely to fall further, or have we seen the worst of it?

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A: As always, there’s little agreement. However, many experts are concerned that company earnings are not going to be as good as forecast, and that could cast at least a temporary pall on the market.

The Dow industrial average--the best-known of the key stock indexes--may slide another 200 points, says Elaine Garzarelli, chairman of Garzarelli Investment Management in New York. But the biggest losses are likely to be concentrated in technology and manufacturing industries that have seen their share prices soar over the past year, she says. Other industries--autos, retailers, home builders and drugs--should hold up fairly well, she says.

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Q: Should I sell now?

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A: If you’re invested for the long haul, the best tack is to grin and ignore daily fluctuations--no matter how steep, says Hugh Johnson, chief investment officer at First Albany Corp. in New York. In the short run, stocks may appear volatile. But over the long haul, they tend to rise by a little more than 10% per year, dips notwithstanding.

But if you are “price sensitive” and have a fairly short time horizon, “take some profits along with the rest of us chicken portfolio managers,” Johnson says.

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Q: I know I’m supposed to hang on for the long haul--and I like the companies I own--but I’m getting worried. Aren’t key measures of market value, such as price-earnings ratios and dividend yields, near where they were in 1987 before the crash?

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A: Yes. But there’s one important difference between now and 1987: interest rates. When evaluating investments, you have to consider your options. In 1987, the U.S. Treasury was paying 9% to 10% on short-term investments. Today, Treasury bills yield 5% or 6%, Garzarelli says.

Unless interest rates were to pop up by 1% or more in the next year, there’s no reason to expect a crash, she says. Garzarelli considers such an increase exceptionally unlikely.