A Wall Street aphorism is getting a test: “It’s not a stock market; it’s a market of stocks.”
The slide in major stock indexes since late May and early June raises the specter of a sea change in investor sentiment toward owning stocks, not just disappointment with the profit outlook for particular companies.
The computer-technology sector, which accounts for a major portion of capital spending by business, has provided plenty of earnings disappointments, beginning with Motorola’s surprise report last Tuesday.
But there is no evidence yet that investors have soured on stocks broadly or on any long-term basis. Investor resilience to volatile markets has been the hallmark of the 1996 stock market.
The Dow Jones industrial average Monday fell 161.05 points, the fourth-biggest point drop ever, to 5349.51. The 2.9 percent fall takes the Dow below the 5400 mark, which many analysts regarded as the low point of its recent trading range that nearly hit 5800 on the high side.
Since a closing peak on May 22, the Dow has fallen 7.4 percent. For the year to date, the Dow is up 4.5 percent. From the peak, the Dow industrials have shed more than $81 billion in market value.
The Nasdaq composite index, home to hundreds of technology stocks, on Monday sank 43.30 points, or 3.9 percent, to 1060.19.
Since peaking June 5, the Nasdaq composite index has lost 15.1 percent on a closing basis. That’s equal to $201 billion in market value. For the year to date, the Nasdaq index is up just 0.8 percent.
Adding to the technology gloom Monday, Applied Materials, a manufacturer of equipment for making computer chips, warned Wall Street that it expects earnings for its fiscal third quarter, ending July 28, to be less than analysts expect. The company’s shares fell $2.62, to $25.37, a 52-week closing low.
After the close of Nasdaq trading, Alliance Semiconductor disclosed a loss for its fiscal first quarter, ended June 30–far worse than analysts expected.
Micron Technology, a NYSE-listed computer-technology stock, fell $2.37, to $19, after megabuck investor J.R. Simplot reported that he sold 9.2 million shares of the stock.
The pain of the technology slump spread throughout the market, as losing stocks outnumbered winners by 21-to-4 among NYSE-listed issues. Big Board trading volume totaled 418 million shares, about average for this year.
James Bianco, market analyst at Arbor Trading Group in Barrington, said there are no signs yet that the level of cash flow into stock mutual funds–about $15 billion was invested last month–has eroded.
“I don’t think we’ve inflicted enough pain on the average mutual fund investor,” he said. “We’re not there yet, but we’re going in that direction.”
Bianco believes Treasury bond yields of about 7 percent do not represent a high enough return on fixed-income investments to prompt an overall shift to bonds from stocks.
Besides, the current slide in stock prices has been widely predicted. “We knew something like this was coming, given the incredible runup we’ve had over the last 18 months,” Bianco said.
Buyers were scarce Monday in the stock and bond markets as analysts and traders awaited Thursday’s congressional testimony on monetary policy.
The yield on the benchmark 30-year Treasury bond climbed to 7.07 percent from 7.03 percent Friday. Some analysts believe investors spooked by the recent stock market slide are parking cash in money market funds and avoiding bond funds.
The Federal Reserve’s decision last month to leave short-term interest rates unchanged was followed by a surprising and potentially inflationary report on job growth and wages.
Several market commentators said the Fed erred by not raising interest rates to cool off the economy, but the recent slide in stock prices indicates investors believe the economy is cooling itself off. Technology companies, which only a few months ago were hiring eagerly to expand production capacity, now are laying off workers. The change is enough to give investors whiplash.
Elsewhere, Ford Motor on Monday offered early retirement incentives to 4,000 salaried workers, seeking 2,000 takers, and Chrysler offered similar packages to 1,200 salaried employees.
These announcements suggest a slowing economy, indicating that the Fed’s stand-pat decision on interest rates was correct. Several closely watched commodity prices, including grains and oil, have been climbing lately, but analysts expect no dramatic increase in Tuesday’s report on consumer price inflation for June.
A key to the near-term outlook for stocks is the trend in profit margins by companies reporting quarterly earnings in the next few weeks. Coca-Cola fell $1.62 Monday, despite posting second-quarter earnings that were in line with estimates. Coca-Cola and other giant consumer-products stocks often are considered places of refuge in a market plunge, but the failure of European and Japanese economies to rebound and the strong dollar have hurt profits at multinationals.
At the same time, speculative fever in small stocks definitely has cooled. Initial public offerings of stock by several highly touted companies, including the California investment banking firm Hambrecht & Quist, have been postponed because of market conditions.
Mutual fund managers and investors counting on a constant flow of hot new issues are witnessing a drought as bad as the Corn Belt.
The slump in stocks appears to be a factor in recent weakness of the U.S. dollar against major foreign currencies. It remains to be seen if non-U.S. investors would provide a new leg to the bull market in U.S. stocks, as some analysts predicted earlier this year. Speculation of higher interest rates coming in Germany and Japan contributed to the dollar’s weakness.
