Warm currents give a lift to wobbly investor confidence
Like a bird learning to fly, investors' confidence in the stock markets has been pushed out of the nest and into a free fall. This past week, however, a warm current carried the market and investors away from the 1,700s brought on by ``Black Monday.'' Following a week in which the Dow Jones industrial average fell 295.98 points, on Friday the Dow closed up 55.2 points, bringing the total for the week up 42.77 points, to 1,993.53. This rise came despite the United States dollar's continued weak showing overseas. The dollar dropped to a seven-year low against the West German mark and fell against the Japanese yen and the British pound.
Since the Dow's historic 508-point, 22 percent fall Oct. 19 to 1,738.74, the market has had tremendous volatility and record share volume as it tries to find a bottom for this correction. One day the market rose a record 186 points. Another day it fell 156 points. Trading reached 604 million shares on Black Monday and 608 million the next day. Since then volume has moved in a range from 260 million shares to 449 million shares.
Trading hours on the stock exchanges last week continued to be shortened by two hours to let brokerages catch up with their paper work. Normal hours are expected to resume Nov. 9.
``I think there's an equilibrium about stock values,'' says Hank Greenleaf, president of H.T. Investors Inc. in Providence, R.I. ``We've wrung out from the markets the excess from two months ago, and I think we've postponed the day of reckoning, but we've been given a nasty preview. This is nothing more than a wrenching correction.''
The immediate effect of the fall has overwhelmed institutional and individual investors, says Marshall Front, executive vice-president of Stein Roe & Farnham, Chicago.
``We're seeing a flight to liquidity and quality,'' Mr. Front says, because investors are putting money in short-term US Treasury bonds, which he considers the highest-quality bond.
``One trillion dollars in wealth was destroyed in the market's fall, and the value of securities has fallen dramatically. This loss could dampen consumer interest and lead to an economic slowdown; people feel less secure and may defer buying a car or a house if stocks don't recover soon,'' he says.
Despite the market's one-day 22 percent fall, a valuable lesson can be gleaned, emphasizes Merton Miller, a professor of finance at the University of Chicago's Graduate School of Business.
``There's an old saying: `The blow that doesn't break my back makes me stronger.' We see there's much more resilience in the markets than people had been inclined to give them,'' he says.
The country has seen the bulk of the bear market, says Robert Linton, chairman of the board of Drexel Burnham Lambert Inc. ``We're in a stabilizing process now,'' he concludes.
``But we see that market volatility is greater and greater, major market moves take less time, and individual investors must not get overextended,'' he adds.
Now is not the time to sell, adds Mr. Front. ``We have seen the worst. People who sell now will have sold at the bottom. We're in a buying range, not a selling range,'' he stresses.
Although market-watchers saw positive signs in last Thursday's 91-point climb, where more stocks than just the blue chips took part in the rally, the volatile nature of the market still indicates some uncertainty. Furthermore, the market's historic fall caught so many people off guard that analysts and managers are cautious in their expectations.
Japan was the one country where a dramatic fall would not have surprised anyone, Mr. Greenleaf says. ``It's ironic, because we thought Japan was the weak link; Japan was the one area we could confidently call,'' with its market greatly overvalued and the potential for hyperinflation great. ``Still, there is room for an enormous correction, and if Japan breaks, can the government support the markets?'' he wonders.
The US market's continuing sensitivity can be seen through the dollar's moves. Last Wednesday, for example, after information came to the markets that central banks were intervening in the world's currency markets to slow the dollar's fall, stock prices turned up from the 60 points the market had fallen in the first half hour of trading. Thursday's gain of 91.51 points, the Dow's third largest ever, was interpreted as a good sign, because the market wasn't rattled by news of the dollar's decline.
The falling dollar affects the markets because of concern that the Federal Reserve Board might raise interest rates to stop the fall. The Fed is walking a fine line between keeping interest rates up enough to protect the dollar and keeping the rates low enough to protect the economy's growth.
Another factor affecting the market's outlook is the British government's $12.2 billion offering in the British Petroleum Company, which will now go through.
Concerns arose earlier in the week about the underwriting losses for firms putting the deal together, if it was not carried out, and also from the effect the offering might have on the world's shaky markets. Seeking to inspire confidence, the British government said that for one month the Bank of England would buy up the shares at about the current market price.
Investor confidence in the markets will return slowly, over three or four weeks, says Monte Gordon, the director of research at the Dreyfus Corporation in New York.
``People have to be convinced that volatility is out of the markets and that emotion has been drained, rather than being blindsided by selling waves,'' he says.
Confidence will also return with signs that the Fed is acting competently and that Congress and the President can reduce the budget deficit, adds Gordon. Last week, congressional leaders met with administration officials to begin working on the basic outline for a $23 billion plan to cut the $148 billion federal deficit.
The US is in its 59th straight month of economic expansion, the longest postwar recovery, despite concerns about inflation, the dollar, and deficits.
``We had felt that the economy would remain strong in 1988 and 1989, because there is ample global liquidity,'' say Greenleaf. ``The only thing that could derail this growth is loss of investor confidence.''