Markets Regain Some Ground, but Worries Remain
Major stock indexes surged back in dramatic fashion Monday from last week’s brutal collapse, as investors poured into some of the biggest technology issues.
But the market’s rebound wasn’t broad-based, and analysts warned that the heavy selling of recent weeks may not have abated for good.
Still, the rally was welcome news on Wall Street, after a weekend of worry that the market might be set up for a replay of 1987’s Black Monday crash--a collapse that followed a huge drop the previous Friday.
The tech-stock-dominated Nasdaq composite index notched its second-best jump ever in percentage terms, soaring 217.87 points, or 6.6%, to 3,539.16 on Monday, as such industry leaders as Intel and Cisco Systems rocketed.
The Dow Jones industrial average jumped 276.74 points, or 2.7%, to 10,582.51, also largely on the strength of its technology shares.
On Friday the Nasdaq index plunged 9.7%, a drop second only to its Black Monday 1987 decline of 11.4%, as a surprising rise in consumer inflation in March triggered dumping of stocks across the board. For the week the index plummeted 25.3%.
The sell-off culminated weeks of declining prices for many of the same technology shares that had been the market’s stars from October through early March, a period in which the stocks reached unprecedented levels relative to their underlying earnings.
On Monday investors worldwide watched nervously as Nasdaq opened the day down 88 points and swung between gains and losses throughout the morning.
But when leading tech stocks turned solidly positive at midday, investors poured in. The Nasdaq composite rose more than 200 points in the final two hours of trading, on the way to its biggest one-day point gain ever.
Nasdaq volume reached its third-highest mark ever at almost 2.5 billion shares.
At midday today in Asia, most stock markets were rebounding, buoyed by Wall Street’s performance. Hong Kong’s Hang Seng index, which slumped 8.6% on Monday, rose 3.7% in afternoon trading today. South Korea’s main index, which plunged a record 11.6% on Monday, was up 4.8% in afternoon trading today.
On Wall Street on Monday, analysts said many investors who have been conditioned to “buy the dips” during the last decade stampeded in late in the day out of fear that they were missing another opportunity to get good stocks at reduced prices.
“Everybody was expecting a crash,” said Scott Bleier, chief investment strategist at Prime Charter Ltd. a New York investment bank. But “the ‘new world order’ is very powerful” as an investment lure, he said, referring to the growth prospects of technology. “It doesn’t end just because we’ve had a corrective process” in stocks.
Nevertheless, experts cautioned that any rebound is likely to be choppy at best. A key test in coming days will be whether stocks can hold their gains and whether the rally can broaden to include more shares, analysts said. If stocks quickly tumble again, many investors who bought Monday may be unwilling to step up anew.
Historically, “bear markets”--extended declines in share prices--experience very strong, albeit temporary, rallies along the way as investors repeatedly rush back into stocks, hoping the downturn has ended.
But the bullishness is dashed each time as prices fall further, saddling bargain hunters with fresh losses.
The Nasdaq index as of Friday was down 34.2% from its March 10 peak, the deepest such bear market decline since 1987.
On Monday, investors rushed into shares of large, and profitable, tech companies such as Apple Computer and Texas Instruments, partly out of the perception that they’ll be the safest stocks in any continued market turbulence.
Yet some Wall Street pros pointed out that Nasdaq giants such as computer networking firm Cisco Systems remained richly priced, relative to earnings, even after Friday’s slide, and could be more vulnerable than people think to another selling wave.
Some of Monday’s buying was due to technical factors rather than to a genuine reassessment of the market’s condition, experts said.
Some mutual funds that dumped tech stocks last week felt compelled to buy to avoid missing a big rally, however temporary it might be, said Richard Cripps, chief market strategist at Legg Mason Wood Walker in Baltimore.
Also, some investors who had sold stocks “short” in expectation of a further drop had to quickly buy them back as prices rebounded, he said.
“The buying was more defensive than offensive,” Cripps said.
Despite the huge gain in the Nasdaq index Monday, falling stocks outnumbered winners by a margin of 26 to 17 on Nasdaq and by about 3 to 2 on the New York Stock Exchange, a sign that investors remain jittery.
Monday’s rally was fed by several high-profile Wall Street analysts who encouraged investors to move back into stocks, arguing that the risk of a deeper market slide had been overstated.
Abby Joseph Cohen, investment strategist at brokerage Goldman, Sachs & Co. and perhaps Wall Street’s most visible bull, said the blue-chip S&P; 500 index could climb 15% by year-end, measured from Friday’s close.
She repeated her view that the recent stock sell-off was caused “by market factors rather than changing fundamentals” for the economy.
Two other well-known stock strategists--Thomas Galvin at Donaldson, Lufkin & Jenrette and Thomas McManus at Banc of America Securities--advised clients to boost the percentage of their portfolios invested in stocks.
The market is “beginning a recovery,” though it is “not out of the woods yet,” McManus said.
Like other experts, McManus doubted that investors will return any time soon to beaten-down smaller and more speculative stocks that had led Nasdaq’s winter surge. Some of those stocks had soared from less than $30 a share to $200, $300 or more, before diving in recent weeks.
“The healing process can take weeks, if not months, for the stocks that have been hit the hardest,” McManus said.
Indeed, many smaller Internet-related stocks and biotech shares continued to fall Monday.
Individual investors over the weekend sent in a crush of orders to online brokerages to be executed Monday, said Ken Pasternak, chief executive of Knight/Trimark Group, a Wall Street trading firm that processes many small-investor orders.
On balance, those investors were selling three stocks for every two they bought. But the number of buyers increased as Monday’s trading wore on and major indexes rose, Pasternak said.
Buying was concentrated in major tech names. Among more speculative tech issues, however, sellers swamped buyers by a ratio of as much as 7-to-1, Pasternak said.
Mutual funds said phone calls from customers increased over the weekend, but many were tax-related. At Janus Funds in Denver, calls rose 15% on Friday, with half of the callers redeeming funds and the other half asking questions about the state of the market, a spokeswoman said.
Margin calls--demands by brokerage firms for investors to put up money to cover losses of stocks bought on credit--declined Monday as the market rebounded.
Nevertheless, many brokerages on Monday continued to sell shares owned by individuals who couldn’t come up with the cash to meet margin calls issued Friday.
“The market didn’t come back enough to forestall all those liquidations,” said Mike Dunn, a spokesman at Datek Online Brokerage.
On Wall Street, experts debated whether last week’s drop, though severe, was sharp enough to permanently turn many investors more cautious on the market.
Bill Meehan, chief market analyst at brokerage Cantor Fitzgerald & Co. in New York, said one of the market’s biggest stumbling blocks over the next few months could be selling by investors who absorbed bruising losses in recent weeks.
Stock rallies could be quickly aborted if investors rush to sell once prices climb back to levels at which they bought, Meehan said. “What people who get underwater tend to want to do most of all is get back to even” and sell, he said.
On a fundamental basis, the stock market could be challenged if investors begin to perceive that the low-inflation, high-growth economy of the last few years is threatened, analysts warned. Friday’s report that March consumer inflation rose much more than expected helped spur the stock sell-off.
On Monday, Treasury bond yields, which have been falling in recent weeks, rose sharply. The 30-year T-bond yield ended at 5.92%, up from 5.78% on Friday.
Experts said that rise partly reflected that some investors were selling bonds to buy stocks. But rising yields may also suggest that investors are growing more concerned about the inflation outlook, and how high the Federal Reserve may raise its benchmark interest rates to slow the economy and keep a lid on inflation.
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STOCK GAINS
The day’s winners included both big-name tech issues and many “value” stocks. C1
