Stocks Do an About-Face
Nirvana didn’t last very long.
An economy and financial market outlook widely hailed as “perfect” just a month or so ago has suddenly become fraught with worry, as Federal Reserve Board Chairman Alan Greenspan turned stern words into action, raising interest rates--and raising the stakes for the 6 1/2-year-old bull market.
Wall Street closed the first quarter on Monday with a drop of 157.11 points, or 2.3%, in the Dow Jones industrial average, leaving the blue-chip index up just 2.1% for the quarter overall.
And that’s pretty much the good news, at least for U.S. markets: For many broader stock gauges--and for the typical stock mutual fund--it was a losing quarter, the first for U.S. stock funds since the fourth quarter of 1994.
The average general U.S. stock fund lost 2% in the quarter, according to preliminary data from fund tracker Lipper Analytical Services in New York.
And nearly all of the decline has come in the last few weeks. The Dow, for example, has tumbled 7.1% from its record high of 7,085.16 reached March 11. Other key indexes have fallen 6% to 13% from their record highs reached at various times in the first quarter.
For investors, the sudden descent of fear into what had been a giddy stock market surge in January and February could be attributed largely to one man: Alan Greenspan.
His warnings against “irrational exuberance” in markets were followed last Tuesday by a hike in the central bank’s benchmark short-term interest rate, the federal funds rate, from 5.25% to 5.5%--the first credit-tightening move in more than two years.
The Fed cited concern that the economy might be growing too fast for its own good, risking higher inflation. But many investors suspect Greenspan had another agenda: to prick what he apparently felt was an increasingly speculative market bubble, after two years of sensational stock gains that lifted the Dow 33.5% in 1995 and 26% in 1996.
If the goal was to deflate the market, the Fed chief is well on his way toward accomplishing that, analysts note. “Certainly a lot of risk is coming out of this market” as prices fall, said Robert Markman, head of Markman Capital Management in Minneapolis.
Yet at the same time, many analysts say the Fed was justified in raising interest rates purely from an economic point of view. Indeed, as another batch of data showed Monday, the U.S. economy appears to be accelerating, led by robust consumer spending amid the tightest job market in many years.
Anticipating the Fed’s move last Tuesday, bond yields had been rising in prior weeks, lifting long-term yields to their highest levels since September.
The bellwether 30-year Treasury bond yield ended the quarter at 7.09%, up from 7.08% last Thursday (markets were closed on Good Friday) and well up from 6.64% at the start of the year.
Now many Wall Street pros believe rates are almost certainly likely to go higher, rather than lower, in coming weeks, if the economic numbers continue to be strong.
“If there is going to be a surprise, I would think it’s in the direction of a stronger economy and higher interest rates,” said James Solloway, research chief at Argus Research in New York.
“I find it hard to believe the Fed is going to think they’ve achieved what they wanted to achieve with just one interest rate move,” said Anthony Karydakis, economist at First Chicago Capital Markets in Chicago.
And if the Fed raises the federal funds rate another quarter-point, Karydakis said, shorter-term bond yields will have to rise further.
Still, no one on Wall Street expects a repeat of 1994, when the Fed was forced to double short-term interest rates from what had been a 30-year low of 3%.
So why does the stock market seem to be taking this so hard?
Analysts note that this decline feels worse in part because, for many smaller stocks, it has been ongoing since summer. Many high-flying growth stocks of last spring have continued to decline since, even as blue-chip shares soared to new highs earlier this year.
Worse, the market’s leaders of 1996--technology shares and financial services stocks--have been among the hardest hit in recent weeks.
The Standard & Poor’s financial stock index has plunged 12.7% from its peak reached in mid-March.
The great concern is that the decline of those leading groups, and the pressure of higher interest rates, could spur a wave of pent-up profit taking in the market that could turn the relatively modest pullback so far into something much worse.
Yet the market’s optimists see this setback as little more than typical--and overdue--in the context of a bull market.
The gloom over Wall Street also was thick last July, when the Dow tumbled 10% from its spring peak before stabilizing, analysts note.
Peter Canelo, strategist at Dean Witter Reynolds in New York, expects investors to begin feeling better about the market when first-quarter corporate earnings reports begin to flow out in coming weeks. The strong economy, he says, will produce strong earnings as well.
But other analysts warn that Wall Street faces other risks now that, combined with higher interest rates, could bedevil stocks.
One major concern: If the U.S. dollar should begin to weaken, it could encourage foreign holders of Treasury bonds to dump some of their holdings before they become devalued by currency shifts.
Because foreigners were such major buyers of T-bonds last year, they could conceivably start a selling panic if they began to unload--driving interest rates even higher, and shaking stocks even harder.
“The dollar is the big risk that is facing credit markets,” said John Lonski, economist at Moody’s Investors Service in New York.
So far, however, the dollar’s value has held. It closed Monday at 123.80 Japanese yen, up 0.32 yen from Thursday.
Meantime, some foreign stock markets provided U.S. investors some solace in the first quarter. European and Latin American markets advanced strongly enough that, even with the healthier dollar cutting into returns, U.S. investors made more in many of those markets than in U.S. stocks.
But Jean-Marie Eveillard, manager of the SoGen International stock fund, worries that a continuing dive in U.S. stocks would cause foreign markets to unravel as well.
“I suspect it may be very difficult to find someplace to hide” until interest rates stabilize, he said.
The point at which many investors decide it’s safe to buy stocks again, he said, “depends on where the bond market settles.”
Among Monday’s highlights:
* Losers swamped winners on the New York Stock Exchange by 21 to 5 in heavy trading, with more than 560 million shares changing hands.
In the Nasdaq market, the composite index lost slightly less than the Dow, falling 27.81 points, or 2.2%, to 1,221.70.
But falling stocks outnumbered winners 2 to 1 on Nasdaq, which suggested more bargain hunting there than on the NYSE.
* Leading the Dow lower were its financial stocks: American Express, down 2 1/4 to 59 7/8, and Travelers, down 2 7/8 to 48.
* Big drug stocks also were slammed by profit takers. Merck sank 4 5/8 to 84 1/4, Lilly plunged 5 1/2 to 82 1/4 and Bristol-Myers dove 5 to 59.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Bull Finally Trips
Wall Street’s seemingly unstoppable stock bull market met its match in the first quarter, as Federal Reserve Board Chairman Alan Greenspan’s words, and then deed--in the form of an interest rate increase--pulled shares down from their peaks. Now the question is: How much lower do stocks go?
Interest Rates Surge...
Yields on one-year Treasury bills and 30-year Treasury bonds, weekly closes since July and latest:
(please see newspaper for full chart information)
30-year T-bond
Monday: 7.09%
One-year t-bill
Monday: 6.01%
Blue-chip indexes finished up from Jan. 1 while smaller-stock indexes fell. All indexes are off sharply from their record highs reached during the quarter.
FIRST-QUARTER CHANGE
DOW transports: +4.6%
S&P; financials: +4.0
S&P; 500: +2.2
Dow industrials: +2.1
NYSE composite: +1.6
S&P; mid-cap: -0.8
Nasdaq composite: -5.4
Russell 2,000: -5.5
Dow utilities: -6.0
DECLINE FROM PEAK
Dow transports: -4.5
S&P; mid-cap: -5.8
NYSE composite: -6.8
Dow industrials: -7.1
S&P; 500: -7.2
Russell 2,000: -7.6
Dow utilities: -9.3
Nasdaq composite: -12.0
S&P; financials: -12.7
Even adjusted for the stronger dollars, many European and Latin American stock markets provided better returns to U.S. investors than domestic stocks.
*--*
1st-quarter Change in Country(index) U.S. dollars Brazil (Bovespa) +28.5% +25.9% Mexico (Bolsa) +11.5 +11.2 Germany (DAX) +18.7 +9.3 France (CAC) +14.7 +5.6 Britain (FTSE-100) +4.7 +0.1 Canada (TSE 300) -1.3 -2.3 Hong Kong (Hang Seng) -6.8 -7.0 Japan (Nikkei-225) -7.0 -13.2
*--*
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
EQUITY FUND CATEGORIES
The average performance of each equity fund category, calculated by Lipper Analytical. Five-year annualized figures are highlighted and can be used to judge an individual fund in the mutual fund listing (beginning on Page D18) against the average.
*--*
Assets Number 15-year 10-year 5-year ($ mlns) of funds Type of fund % return % return 2,976.7 32 Latin American N/A N/A 16,226.3 126 Emerging markets N/A N/A 9,526.8 69 European region N/A 126.54 7,612.7 24 Financial services 1,026.39 356.71 64,958.6 64 S&P; 500 index objective 983.45 227.95 4,020.1 24 Intl. small cap N/A N/A 6,262.1 66 Real estate N/A 186.84 97,797.8 195 Equity income 687.07 180.65 123,906.4 416 International 687.35 130.21 356,697.0 639 Growth & income 789.76 202.15 72,540.3 195 Global 848.06 157.94 2,307.4 35 Specialty/misc. N/A 187.22 21,417.9 96 Utilities 602.60 149.97 400,409.5 852 Growth 767.33 202.93 16,310.1 35 Global small cap 603.23 123.42 9,350.7 33 Health/biotechn. 1,909.73 336.85 10,321.3 86 Pacific excluding Japan 655.25 153.37 98.9 4 Environmental N/A 102.36 78,544.7 240 Capital appreciation 695.74 176.04 7,059.0 47 Pacific region 1,042.99 68.03 6,095.4 43 Natural resources 428.01 106.07 146.0 4 Canadian N/A N/A 3,391.4 32 Micro cap 674.93 166.39 84,385.6 232 Mid cap 665.75 202.81 89,445.4 463 Small cap 633.19 195.38 2,052.10 29 Japanese 386.13 54.71 18,174.4 54 Science and techn. 878.63 285.23 4,624.4 47 Gold-oriented 124.75 5.12 1,175,629.8 2,717 General equity funds average 751.29 197.51 269,709.4 1,110 World equity funds average 565.91 100.44 15,516,658.7 4,182 All equity funds average 735.37 188.29
Assets ($ mlns) % return 2,976.7 27.31 16,226.3 71.91 9,526.8 93.52 7,612.7 177.78 64,958.6 108.99 4,020.1 59.93 6,262.1 93.59 97,797.8 92.60 123,906.4 69.09 356,697.0 95.22 72,540.3 75.63 2,307.4 89.05 21,417.9 69.91 400,409.5 89.07 16,310.1 65.57 9,350.7 89.50 10,321.3 74.31 98.9 25.95 78,544.7 80.47 7,059.0 56.60 6,095.4 97.53 146.0 53.33 3,391.4 56.40 84,385.6 83.30 89,445.4 85.94 2,052.10 5.99 18,174.4 155.01 4,624.4 48.04 1,175,629.8 89.60 269,709.4 66.40 15,516,658.7 86.58
*--*
EQUITY FUND CATEGORIES
The average performance of each equity fund category, calculated by Lipper Analytical. Five-year annualized figures are highlighted and can be used to judge an individual fund in the mutual fund listing (beginning on Page D18) against the average.
*--*
Assets Number Annualized 1-year ($ mlns) of funds Type of fund 5-yr.% ret % return 2,976.7 32 Latin American 4.95 30.21 16,226.3 126 Emerging markets 11.45 14.04 9,526.8 69 European region 14.12 21.48 7,612.7 24 Financial services 22.67 25.48 64,958.6 64 S&P; 500 index objective 15.88 19.24 4,020.1 24 Intl. small cap 9.85 12.86 6,262.1 66 Real estate 14.12 34.68 97,797.8 195 Equity income 14.01 15.69 123,906.4 416 International 11.08 8.87 356,697.0 639 Growth & income 14.32 15.67 72,540.3 195 Global 11.92 10.98 2,307.4 35 Specialty/misc. 13.58 5.66 21,417.9 96 Utilities 11.18 9.15 400,409.5 852 Growth 13.59 12.06 16,310.1 35 Global small cap 10.61 6.35 9,350.7 33 Health/biotech. 13.64 2.49 10,321.3 86 Pacific excluding Japan 11.75 0.43 98.9 4 Environmental 4.72 5.97 78,544.7 240 Capital appreciation 12.53 5.89 7,059.0 47 Pacific region 9.39 -4.70 6,095.4 43 Natural resources 14.58 14.01 146.0 4 Canadian 8.92 5.44 3,391.4 32 Micro cap 10.72 7.55 84,385.6 232 Mid cap 12.88 4.47 89,445.4 463 Small cap 13.21 4.43 2,052.10 29 Japanese 1.17 -19.29 18,174.4 54 Science and techn. 20.59 8.72 4,624.4 47 Gold-oriented 8.16 -20.01 1,175,629.8 2,717 General equity funds average 13.65 10.85 269,709.4 1,110 World equity funds average 10.72 8.11 15,516,658.7 4,182 All equity funds average 13.29 10.33
Assets Quarter ($ mlns) % return 2,976.7 13.38 16,226.3 9.21 9,526.8 4.73 7,612.7 2.69 64,958.6 2.54 4,020.1 2.40 6,262.1 1.95 97,797.8 1.83 123,906.4 1.35 356,697.0 1.25 72,540.3 0.90 2,307.4 -0.81 21,417.9 -1.09 400,409.5 -1.24 16,310.1 -1.55 9,350.7 -1.88 10,321.3 -3.23 98.9 -3.39 78,544.7 -3.66 7,059.0 -3.79 6,095.4 -4.37 146.0 -5.01 3,391.4 -5.54 84,385.6 -5.89 89,445.4 -7.04 2,052.10 -7.86 18,174.4 -7.90 4,624.4 -8.02 1,175,629.8 -1.98 269,709.4 1.35 15,516,658.7 -1.11
*--*
Source: Lipper Analytical
MAIN STORY: A1
