Swaying to the boom-bust-boom beat. Market still fluctuates six months after the plunge
Last year's stock market plunge was notable for its volatility and severity: a dramatic 508-point dive that suggested the threat of recession, or worse, as comparisons of 1929 quickly became the order of the day. Yet, six months after Oct. 19, the United States has avoided an economic downturn. No recession is in sight. Nor can it be said that 1987-88 has been a repeat of 1929, although the market's technical performance has somewhat resembled gains in the market in the spring of 1930, before beginning a downward momentum that was not fully reversed until World War II.
Volatility remains the order of the day, underscored by last week's unexpected negative report on the US trade deficit and the subsequent plunge in the market. The trade deficit widened in February, to $13.8 billion, a $1.4 billion increase from January.
Both stock and bond prices quickly fell on the news Thursday, with the Dow Jones industrial average falling 101.46 points over concern that interest rates would climb. By late afternoon the New York Stock Exchange had imposed a suspension on computerized program trading, the second time it had done so since October.
For the week, the Dow closed at 2,013.93, down 76.26 points.
Are there similarities with last October? Yes, says Robert A. Brusca, chief economist with Nikko Securities Company International, in New York. ``At least this time there was a collar on program trading,'' he says, adding that the upward momentum on the market ``has been arrested, incarcerated, and put in prison.''
The financial market has been characterized by a ``boom-bust-boom-bust-boom'' attitude since late last year, says Philip J. Roth, an analyst with Shearson Lehman Hutton Inc. After the October plunge - in which that month's trade deficit was believed to have been a key factor leading to the market dive - the outlook was bearish, Mr. Roth notes.
After a rally in December the outlook became bullish, but in January, there was a shakeout in the market and the bears strode back. Then came spring and an good gain for the market, with the dominant view once again positive. ``But investors have very little confidence in the market environment and the economic environment,'' Roth says.
``One bad economic situation,'' he adds, ``and investors will think the boom is over.'' Is the February trade report such a ``bad situation''? For the moment at least, Roth says, ``the jury is still out'' on the full implications of the latest trade numbers.
``The trade deficit resulted from a big increase in imports. That's a sign of economic strength,'' he maintains. He says that the February numbers ``are disappointing, but it would be premature to see a month of increased imports'' as creating the type of climate that would necessarily send the market downward for any protracted period of time.
Clearly, looking beyond short-term variables such as the February trade numbers, the repercussions of Oct. 19 have been fairly pervasive:
Within the financial community, there have been massive investment house layoffs - an estimated 15,000 people - as the houses retrenched or consolidated.
Thousands of smaller investors have pulled out of equities for other forms of investment.
At the same time, Washington and the investment community have yet to undertake the type of long-range reforms on trading called for by the Brady Commission, set up after October.
Still, in one positive development last week, the US and its main trading partners reaffirmed their commitment to preventing another slide in the dollar. A stable dollar is a key not only in calming the domestic investment climate, but in wooing back overseas investors.
John D. Connolly, an analyst with Dean Witter Financial Services, believes one result of a more stable dollar could be a return of overseas investors to the market later in the year, particularly European ones. Foreign investors, he maintains, have been ``cautious to bearish,'' a position that is understandable, since the falling dollar has hurt returns on US investments.
For the moment, however, Wall Street's challenge is to lure back not just overseas investors but all investors. In fact, the US economy as a whole and Wall Street as a community seem to be marching to somewhat different drummers. Many underlying indicators - growth, inflation, jobs - continue to be upbeat. The market, by contrast, has been lackluster, marked by generally low trading volume, although stocks have rallied in recent weeks.
Still, despite the technical ups and downs in the market since last October, the overall trend has been more of advance than decline. ``The average stock,'' Roth points out, ``has advanced some 30 percent since early December. But that means that the market is very sensitive and quick to respond to any adverse news.''
``The [underlying] economy is obviously doing well. But historically, the stock market and the economy do not always move in tandem,'' observes Raymond Worseck, investment strategy coordinator of A.G. Edwards & Sons Inc. in St. Louis. Indeed, Mr. Worseck says, ``when we look at value in the market, in terms of earnings, expected dividends, yields, expected dividend growth,'' it becomes clear that the market ``is currently overvalued. The bond market, however, is fairly valued,'' given the moderate growth expected in the months ahead.
A.G. Edwards remains among the more cautious of the nation's investment firms. ``A defensive equity posture is still favored,'' the firm recommended in its April investment strategy bulletin.
The analysts at Dean Witter are somewhere between bullish and bearish. ``Granted, the economy is behaving better than the stock market,'' Mr. Connolly says. But at the end of January, Dean Witter raised its asset allocation in stocks, he points out. At that time it was recommending 50 percent in equities compared, with a 17 percent holding in cash. As of last week, however, it was calling for 58 percent in equities, versus only 7 percent in cash (with the rest in bonds.) ``We're not saying the stock market is super aggressively cheap,'' Connolly says. ``The market is not grossly overvalued, nor is it cheap. It's in-between.''
Worseck of A.G. Edwards calls the market ``quite a selective bag at this point.'' Investors, he says, should consider specific companies, rather than focusing on industries as a group.
Roth likes capital-goods firms and basic industries. But at the same time, he says, it is good to ``think defensive.'' For that reason, he would consider utilities, the energy sector, and consumer staples, such as food and beverage companies.