Stock Market Executes an Abrupt About-Face
A dramatic stock market turnaround lifted the Dow Jones index to its best one-day gain in 15 years Wednesday, as the arrest of Adelphia Communications Corp. executives and congressional action on a corporate reform bill buoyed investors’ spirits.
The Dow industrials turned a morning loss into a 488.95-point gain, to 8,191.29, by the end of trading. It was the index’s second-largest jump ever in terms of points, and the 6.4% rise was the biggest daily percentage advance since 1987.
Despite the surge, many experts remained reluctant to declare an end to the long bear market, the worst in a generation. They said Wall Street was primed for a rebound after nine weeks of almost relentless selling.
Even so, the rally provided a welcome respite from the gloom that has enveloped the market and driven many shares to their lowest levels in at least five years.
Analysts said House and Senate negotiators’ agreement on corporate reform legislation--as well as the televised arrests of John Rigas and other executives at the heart of the Adelphia accounting scandal--helped lift investors’ moods after months of headlines about widespread corporate fraud.
“What happened in Washington was very important for the markets,” said Subodh Kumar, strategist at CIBC World Markets in New York. “Even [Federal Reserve Chairman Alan] Greenspan has acknowledged that the market’s checks and balances failed us. Now the market is saying, ‘We want reform--we want those failures to be addressed.’ ”
Said Diane Keefe, manager of the Pax World High Yield Bond fund in Portsmouth, N.H.: “The arrests sent a signal to investors--the guys with the white hats came in to clean things up. Having been recently burned by Adelphia, I’m one of many who are pleased to see the wheels of justice turning rapidly.”
As trading opened Wednesday, it appeared that the market was headed for new lows. The Dow initially fell 170 points, extending its loss during the last nine weeks to 2,450 points, or nearly 25%.
But buyers quickly swarmed into the market, and the rally built up steam through the day. By the close, New York Stock Exchange trading volume had set a record.
Every major market index resurged. The blue-chip Standard & Poor’s 500 rallied 5.7%, and the technology-heavy Nasdaq composite index jumped 5%.
Among big-name stocks, banking giant J.P. Morgan Chase & Co. gained $3.22 to $23.30, drug titan Merck & Co. rose $3.55 to $42.60, and retailer Wal-Mart Stores Inc. was up $2.84 to $47.94.
The Dow’s percentage gain, at 6.4%, was the biggest since the index surged 10.2% on Oct. 21, 1987, rebounding from the record Oct. 19 dive of 22.6%.
But experts warned that Wednesday’s rally provided no assurance that the 28-month-old bear market has ended. Potent but short-lived rallies are common during continuing market declines, as bullish investors temporarily gain the upper hand and short-term traders go along for the ride.
As recently as July 5, the Dow soared 324 points.
“The market was incredibly oversold, and you can only stretch the rubber band so far before it snaps back,” said Russ Koesterich, U.S. equity strategist at State Street Global Markets in Boston. So-called short covering also fueled the day’s rally, he said.
Short sellers are traders who bet on lower stock prices by borrowing shares and selling them, expecting to buy them back at a lower price later. In a market rally, short sellers can rush in to buy stocks to close out their bets. That can help drive prices higher for a time.
Many individual investors said they remained skeptical that share prices had hit bottom.
“You have one day where it zooms up. It gives people investing in the stock market some confidence,” said Robert Wall, 21, an intern at the mayor’s office of workforce development in downtown Los Angeles, who shifted his money from stocks to bonds in March. “Although this is very reassuring, it’s not going to be a factor that says I’m going to get into the market right now.”
Said Allan Spring, a 45-year-old computer programmer in Irwindale: “There’s been other times too when it’s been a good day on the market, but then the next couple of days eat up all those gains.”
Small investors have been adding to the market’s losses in recent weeks by pulling money out of stock mutual funds, forcing fund managers to dump shares.
Analysts say one factor working against a sustained rally is that investors who haven’t sold, and now regret watching their losses deepen during the last few months, will be tempted to exit if stocks rebound.
Someone who bought stock of computer networking giant Cisco Systems Inc. in 2000 for more than $50 a share, for example, might hesitate to sell now at $13, but he could be tempted to cut his losses and run if a rally takes it to $20 or $30.
Even after Wednesday’s surge, the Dow is down 18.3% this year. The S&P; 500 is down 44.8% from its record high set in March 2000.
Koesterich said today’s trading would offer crucial clues about the market’s near-term direction.
“We’ve seen several large, abrupt rallies recently, but what’s been lacking is a follow-through rally on respectable trading volume,” he said. “For this to be anything more than a one-day wonder, investors are going to have to show some conviction.”
After the market closed, AOL Time Warner Inc. became the latest company to say the Securities and Exchange Commission is looking into its accounting--a reminder that worries about the truthfulness of corporate books still abound.
And more fundamental problems also dog stocks: Share prices remain high, historically, compared with underlying corporate earnings. And questions about the economy’s strength in the second half of this year raise doubts about how good earnings will be.
Some experts said investors might be disappointed if more executive arrests are not made in coming months, such as in high-profile scandals involving Enron Corp., WorldCom Inc. and others.
“I hope the government is confiscating some other people’s passports, because if we don’t see more indictments, something is seriously wrong,” said Jay Ritter, finance professor at the University of Florida.
Still, some individual investors called Wednesday’s arrests a step toward making executives more accountable.
“I think it’s good that they’re finally going after people that are corrupt, that hurt everybody else--people that end up losing all their money,” said Marsha Bartholomew, a 58-year-old bank manager in Laguna Hills.
Similarly, the congressional compromise on the corporate reform bill was seen as a move toward restoring investor confidence, though not a cure-all.
“The reform bill is an important step forward but not the whole enchilada,” said Tim Smith, president of the Social Investment Forum and vice president of “socially responsive” investing at Walden Asset Management in Boston. Even so, he said, “in this period of tremendous uncertainty, the market is going to respond positively to even partial solutions.”
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Biggest Dow Point Gains
The Dow Jones industrial average on Wednesday recorded its second-biggest daily point gain. The Dow’s percentage gain was the biggest since 1987 but did not rank among the top 10 historically.
Point Pctg. Date gain Close gain
March 16, 2000 499.19 10,630.60 4.9%
July 24, 2002 488.95 8,191.29 6.4
April 5, 2001 402.63 9,918.05 4.2
April 18, 2001 399.10 10,615.83 3.9
Sept. 8, 1998 380.53 8,020.78 5.0
Sept. 24, 2001 368.05 8,603.86 4.5
May 16, 2001 342.95 11,215.92 3.2
Dec. 5, 2000 338.62 10,898.72 3.2
Oct. 28, 1997 337.17 7,498.32 4.7
Oct. 15, 1998 330.58 8,299.36 4.1
July 5, 2002 324.53 9,379.50 3.6
Source: Dow Jones & Co.
* Times staff writer Kelly Yamanouchi contributed to this report.
