Ride Over or Just Refueling?
Wall Street on Wednesday took a well-earned breather from triple-digit market moves, as the Dow Jones industrial average rose a modest 8.35 points and trading volume ebbed by more than a third from Tuesday’s overheated levels.
But the modest overall move obscured the truth of what was, in fact, a highly volatile trading session, with the Dow industrials seesawing between a gain of nearly 123 points in the first hours of trading and a loss of 41.5 points late in the day before closing nearly flat at 7,506.67.
Some market professionals attributed the market’s fizzle to sheer investor fatigue following the 554-point plunge in the Dow on Monday and the 337-point rebound Tuesday.
“I think people are exhausted,” said Ray Devoe, investment strategist at the brokerage Legg Mason in Baltimore. “We’ve had the two busiest days in history, and I suspect [investors] shot a lot of their ammunition” buying stocks late Tuesday and early Wednesday. “I suspect we could have a down market the rest of the week.”
Others believe stocks have not yet declined to rational valuations and are destined to revisit this week’s lows--if not necessarily in as harrowing a fashion as Monday--before becoming more stable.
“The catharsis we saw on Monday . . . was certainly welcome and corrected a substantially overvalued market,” said Lawrence Rice, chief equity strategist for the investment firm of Josephthal Lyon & Ross in New York, “but it hasn’t taken enough out of the market.”
Rice said he thought the market would be reasonably valued when the Dow industrials sank to between 6,500 and 6,800 points.
“I don’t like things to be at 8,100,” he said, alluding to the Dow’s levels near their August peaks. “There’s no margin for error.”
Leading the march down Wednesday were some prominent high-tech stocks, including Intel, which lost $4.13 to close at $80.25, and Dell Computer, which lost $7.50 to close at $83.50.
Analysts’ concerns that such companies may be exposed to slowing economic conditions in Asia may have intensified after a congressional appearance by Federal Reserve Board Chairman Alan Greenspan. Greenspan noted that the effects on U.S. companies of Asia’s economic travails “can be expected not to be negligible.”
In fact, Asian markets appeared to have resumed their slump today after a one-day rally inspired by Tuesday’s Wall Street recovery. Hong Kong’s Hang Seng stock index opened lower by more than 4%, the Nikkei-225 index of stocks on the Tokyo Stock Exchange fell 2.89% in morning trading, and Korean stocks opened down 3%.
In other U.S. markets, the Nasdaq composite declined a negligible 0.27 points to 1,602.75, despite the slide in leading stocks. That indicated strength in a wide universe of smaller stocks, analysts said. The S&P; 500 stock index declined 2.69, or 0.29%, to 919.16
Investors also appeared to have resumed a flight to quality in their buying of U.S. Treasury securities, with the yield of the bellwether 30-year bond at 6.19%, up from 6.28%.
Wednesday’s trading came against a backdrop of intensifying debate over what caused Monday’s rout and whether the New York Stock Exchange’s “circuit breakers”--which twice halted all trading in the heat of the sell-off--staved off disaster or only exacerbated the sell-off.
In testimony before separate congressional subcommittees, Greenspan and Securities and Exchange Commission Chairman Arthur Levitt both hinted that they would like to see the trading halts redesigned to avert premature triggering.
The NYSE’s circuit breakers, imposed in 1990 in reaction to the 1987 market crash, impose a 30-minute trading halt whenever the Dow industrial average drops 350 points in a single session. If the Dow drops a further 200 points after the reopening, all trading ceases for another hour.
On Monday both measures kicked in. The second halt, coming at 3:30 p.m. Eastern time when the Dow had fallen 554 points, closed the market for the day, 30 minutes early. Other exchanges, including the Nasdaq stock market, regional U.S. exchanges, and the Toronto Stock Exchange, also closed.
Critics of the measures argue that they have failed to keep pace with the Dow’s advance from roughly 1,750 in 1990 to more than 7,500 today. The first trading halts were originally designed to kick in after falls of 250 and 400 points at a time when those drops accounted for 14.3% and 22.8% of the Dow. The circuit breakers were widened earlier this year to 350 and 550 points, but on Monday, those thresholds accounted for drops of only 4.5% and 7.12%.
NYSE Chairman Richard Grasso acknowledged this week that the triggers may have been set to tightly and said he would consider proposals to key the trading halts to a percentage decline, rather than fixed point levels. SEC Chairman Levitt said in his congressional appearance that his agency, which must approve any change, would also study the matter.
But other market professionals and economists believe that any artificial brake on trading is dangerous and unfair.
Many traders say they believe Monday’s market might well have recovered on its own, without the trading halts--and that the halts actually prevented them from getting the best price for their transactions and may have choked off emerging buying trends.
“These things caused a vacuum in the market,” complained James Craig, portfolio manager at the mutual fund firm of Janus Capital in Denver.
“I was looking to buy all sorts of things Monday afternoon and they closed the market on me,” he said. By the time he was able to post his buy orders the next morning, Craig said, prices had already come sharply off their lows. “If I had a free trading market on Monday I would have been able to buy a lot more,” Craig said.
As for what sparked Monday’s decline, some have pointed the finger at mutual-fund managers, arguing that they dumped stocks in an effort to “lock in” the terrific gains their funds have achieved so far this year. Or, as the rout worsened late Monday, they supposedly sold to raise cash in anticipation of redemption demands by individual investors.
But Brian Mattes, a spokesman for fund giant Vanguard, calls that scenario “absurd.”
In the first place, Mattes said, the 10 largest U.S. funds all have suffered losses this week that have closely tracked those of the Standard & Poor’s 500-stock index.
Had managers been nimble enough to avoid Monday’s crash by dumping, at least a few probably would have managed gains, which didn’t happen.
In any event, a selling panic among small investors never materialized.
By Tuesday, fund investors mostly were in a buying mood, many fund companies said. “Investors seem to be buying more than selling in both U.S. and international equities. The volumes have been big, but the net [cash] flows aren’t all that big,” said Steven Norwitz, a spokesman for T. Rowe Price in Baltimore.
Many fund companies did report an increase in overall calls from clients.
Fidelity Investments, the nation’s largest mutual fund group, kept about 180 extra employees in place to help handle the phones Wednesday, said Andy Trincia, Fidelity spokesman.
But the Vanguard Group, the No. 2 fund company, on Wednesday morning relieved its “Swiss army” of extra staff trained to answer phones in times of market volatility. The drop in call volume eliminated the need to keep on the extra staff, said a Vanguard spokesman.
Bond yields fell on Greenspan’s comments, sending the yield on the benchmark 30-year Treasury bond down to 6.20 percent from 6.29 percent Tuesday.
Among Wednesday’s highlights:
* Financial companies benefited from lower interest rates. BankBoston Corp. rose $2.63 to $84.38, while TransAmerica gained $2.88 to $102.38 and American International Group rose $1.44 to $104.
* Among other tech stocks, Compaq fell $3.19 to $63.44, Ascend Communications slid $1 to $28.44 and Sun Microsystems dropped $1.81 to $34.38.
The dollar fell against the German mark as Fed chief Greenspan said Asia’s financial crisis may dampen U.S. growth next year, tempering expectations of a near-term interest rate hike.
Times staff writers Jennifer Oldham, Debora Vrana and Tom Petruno in Los Angeles and Thomas S. Mulligan in New York contributed to this report.
MORE MARKETS COVERAGE: A1, D2, D6
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Rally, Then Fade
The Dow Jones industrials rose 123 points early Wednesday, extending Tuesday’s market rebound. But stocks’ gains ebbed away as trading continued, and the Dow closed up just 8.35 points at 7,506.67. Wednesday’s Dow trend:
Wednesday close: 7,506.67
Tuesday close: 7,498.32
Source: Bloomberg News
