Your Money : Midyear Review of Investments and Personal Finance : The Riots of Spring Are Soon Quelled : Frenzied Demand for Smaller Stocks Marks 2nd Quarter

By TOM PETRUNO

June 29, 1996 12 AM PT

TIMES STAFF WRITER

The speculators ran riotous on Wall Street in the second quarter, but as with most riots, this one was put down rather quickly.

Dramatic spring gains in many smaller stocks gave way to heavy profit taking in June--but not before fueling widespread fears that the crazed action was a fresh sign of a bull market peak.

For the stock market overall, however, the second quarter saw another advance, extending the latest market surge to six straight quarters--despite heated competition from commodity markets, a continually rocky bond market and growing concerns about corporate profits.

On Friday, the Dow Jones industrials eased 22.90 points, but the index’s closing value of 5,654.63 was still up 1.2% from the end of the first quarter. That brought the Dow’s year-to-date gain to 10.5%.

Broader market indexes fared better Friday and in the quarter as a whole. The Nasdaq composite index of mostly smaller stocks continued on Friday to rebound from its recent drubbing, jumping 19.01 points to 1,185.02, for a second-quarter net gain of 7.6%. For the year to date, the Nasdaq index is up 12.6%.

Strong investor demand for smaller stocks was perhaps the biggest market story of the second quarter, as the U.S. economy’s resilience suggested a decent business environment for smaller firms.

By May, the appetite for smaller stocks turned gluttonous as investors continued to pour near-record sums into stock mutual funds and fund managers feverishly bid for new stock issues.

Iomega Corp., a maker of data storage devices, became the symbol of the small-stock mania, zooming from a 52-week low of $2.75 to a peak of $55.

That mania frightened many veteran Wall Streeters, who warned that such parabolic gains in stocks are a classic sign of a bull market nearing a peak, as investors abandon all caution.

“It almost looks like people figured that time was beginning to run out [for the bull market] and they said, ‘Let’s put the pedal to the metal,’ ” said Marshall Acuff, investment strategist at Smith Barney Inc. in New York.

Meanwhile, another mania was blooming in commodity markets, as grain prices soared on worries about lousy spring weather in the Midwest and about low grain stockpiles worldwide.

But the weather finally cooperated, and wheat and soybean prices have tumbled in recent weeks. Then copper prices burst with the news of a massive trading scandal involving Japan’s Sumitomo Corp., leading industrial metal prices in general lower. Gold hit a nine-month low Friday, closing at $380.10 an ounce.

Likewise, on Wall Street the spring explosion in smaller stocks gave way to severe profit-taking in many issues in June. At its low point last week, the Nasdaq composite index was off 7.7% from the record high reached on June 5. Iomega has plunged back to $29.

While bearish investors now see trouble in small stocks’ rapid descent, bullish analysts say the markets’ ability to quickly correct wild excesses--like Iomega--is a good sign. “The cooling that has taken place is healthy,” says Eric Miller, strategist at DLJ Securities in San Francisco.

Two big questions now loom for stocks’ bull market, experts say.

First, will the Federal Reserve feel compelled to raise short-term interest rates any time soon to keep the economy from expanding too quickly and threatening higher inflation?

The Fed meets Tuesday, and the bond market--after being trounced by economy-fearing sellers in recent months--this week began to bet heavily that the Fed will refrain from a rate hike.

On Friday, the 30-year Treasury bond yield fell from 6.99% to 6.89%, the lowest since late May.

Miller argues that the Fed has no overwhelming reason to boost rates, because the economy isn’t showing dramatic strength. If he’s right, Miller says, interest rates can come down further. “I think the case for a bond rally beyond this week is a good one,” he says.

That could help the stock market deal with its second big question: How sharply will corporate profit growth slow in the quarters ahead?

Fear of weak second-quarter earnings has been a primary catalyst behind the sell-off in smaller stocks in recent weeks, especially in the tech sector, where numerous firms have already warned about disappointing results.

Even so, Wall Street’s bulls say it’s hard to envision a major interruption of demand for stocks, barring recession concerns or a Fed rate increase. The 1990s refrain--What else can people do with their money?--still applies, bulls say.

Indeed, small-stock buyers were back in action Friday, snapping up the initial public offering of Donna Karan. The firm sold 10.75 million shares at 24 each. They jumped to close at 28 on the Big Board.

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Hot Markets Cool Down

Wall Street’s second quarter saw a speculative frenzy that drove some individual small stocks, and some commodity prices, sky-high. But the wild gains in small stocks--including many new issues--tended to be short-lived, as was the commodity rally. Even so, the stock market overall advanced, as bond yields plateaued and then began to decline.

Iomega’s Ride

The data-storage-device maker’s shares symbolized the mania for small issues. Weekly closes:

Friday: $29.00

Wheat’s Boom, Bust

Grain prices rocketed on crop-shortage worries, but spring rains washed away fears. Weekly closes per bushel:

Friday: $4.78

Peace For Bonds?

Yields are sliding again, on expectations for slower economic growth. 30-year T-bond, weekly closes:

Friday: 6.89%

Key Indexes

How key stock indexes fared in the first quarter and the first half:

Nasdaq composite