Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Tue, Oct 6 1992 Date: Tue, 6 Oct 92 05:45:32 EDT Message-ID: 10-06 0000 BONUS: Stock market is in trouble USA TODAY Update Oct. 6, 1992 Source: USA TODAY:Gannett National Information Network The stock market is stressing out as investors grow weary of waiting for, and betting on, an economic recovery that always seems just around the corner. Monday, investors frantically sold stocks in the morning, then reversed and started buying after lunch. The Dow Jones industrial average, after plunging more than 100 points by 11:20 a.m. ET, finished down only 22 points at 3179. IS THIS SELLOFF A TREND? The past three trading days, the Dow has fallen 92 points, or 3%. Since hitting a high of 3413 in June, the Dow has fallen 7%. Broader stock measures have also fallen. Since hitting a high of 425 Sept. 14, the Standard & Poor's 500 index has dropped 4%. Some market professionals were encouraged that stocks bounced most of the way back Monday. But many saw the crazy day as another sign that the stock market is in trouble. "We're dealing with the early part of a bear market," says money manager Greg Kuhn of Easton, Pa. "At this point, I would not own stocks." HAVE INVESTORS GOTTEN CAUGHT IN THE MARKET? A lot of investors may be getting the message too late. All year, investors flowed into stocks. Falling interest rates cut their income from money-market accounts and bank certificates of deposit and raised hopes of an economic recovery. But those hopes are waning, and investors, many of whom have been burned, are tired of waiting. For many of them, low 3% rates being paid on bank CDs are beginning to look good against stocks that look primed to head lower. Analysts expect more to bail out soon as the economy continues to muddle and uncertainties mount. HOW SIGNIFICANT IS THIS MOVE? The Dow's latest move - the sell-off began Thursday, when poor economic reports scared investors - marks its first significant move since December. Then, stocks surged on hopes that falling interest rates would boost the economy, which would boost company earnings - a seemingly safe prescription for rising stocks. But since early January, the Dow has been trapped between 3200 and 3400. Analysts call any move out of that sort of tight trading range a breakout. "Sort of ominous that it's on the down side, isn't it?" says Michael Metz, strategist at Oppenheimer & Co. HOW DID THIS SLIDE OCCUR? While stock averages bounced within that tight range, investors continued to buy. No doubt, some investors now feel suckered. Leading the charge from CDs and other savings into the riskier world of stocks: individual investors. By the end of August, $49.4 billion flowed into stock mutual funds, vs. a $38.4 billion net inflow for all of last year, according to Investment Company Institute. WHAT DID INCREASED DEMAND DO TO THE MARKET? That increased demand for stocks helped push many large stocks to highs this year, even though the economy remained disappointing. For much of the year, investors were placated by the fact that many companies were able to eke out earnings gains by cutting costs and debt payments. In the second quarter, for example, earnings rose 19% while revenue rose only 5%, according to SOM Economics. The problem is that companies can cut costs and debt only so much. At some point, they have to do more business to continue to post profit gains. And to do that, they need a strengthening economy. WHY COULDN'T INVESTORS SEE THIS COMING? Investors knew for months that the economy was in trouble. But they kept hoping lower rates would turn things around. "Wall Street tends to put things on the back burner," says Al Goldman, strategist at A.G. Edwards. "But it's now returning to the reality that the economy and earnings are stuck in the mud." Goldman adds that "corporate earnings will be up (in the quarter that ended Sept. 30) but not nearly as much as people were betting just a month ago." Indeed, companies recently warning of weaker-than-expected earnings have seen their stocks plummet. WHAT IS THE PRESENT SITUATION FOR STOCKS? Says Hugh Johnson, stock strategist at First Albany: "We've reached that point when we're supposed to see a pay off to what the Fed has done. But we're not seeing it." The worst-hit stocks are those sensitive to changes in economic cycles, called cyclical stocks. Auto stocks, paper stocks and heavy-equipment makers have been pounded hardest. SO WHERE IS THE MARKET GOING FROM HERE? An ongoing European currency crisis has some analysts troubled about its eventual impact on U.S. financial markets. Foreign stock markets have already weakened. The strong showing of Gov. Bill Clinton and on, off, on-again presidential candidate Ross Perot have created additional uncertainty. And some widely watched Wall Street chart watchers such as Professional Tape Reader Editor Stan Weinstein and Technical Trends Editor John McGinley are turning more bearish. WHAT IS THE MAIN REASON FOR THE BEARISH OUTLOOK? One main reason: Based on earnings for the past 12 months, the Standard & Poor's 500 stock index is trading at a price-earnings ratio of 24. McGinley says the last time P-Es were so high was 1987 in the months leading up to the Oct. 19 crash. He doesn't expect another crash but thinks the market will ratchet lower for a long time. "We're setting up for a longer bear market that could last up to 18 months," Kuhn says. "The Dow could drop to around 2000." WHAT ARE THE INVESTORS' MAIN CONCERNS? Their over riding concern remains the economy. Some investors are hoping the Federal Reserve board again cuts short-term interest rates this week. Indeed, rumors that the Fed and the German central bank will act in concert to push worldwide interest rates lower helped the Dow recover Monday. But for investors, that is more of the same. Interest rates have been falling all year without lifting the economy. Investors no longer have faith that even-lower rates are the answer to their woes. "It's not going to do a darn thing for the economy," Kuhn says. And investors are tired of waiting. IS THERE ANY RELIEF IN SIGHT? Relief for the economy may come after the November election. No matter who wins, Goldman expects the federal government to take strong steps beyond interest -rate reductions to improve the economy. "That's one reason why this market isn't heading to Armageddon," he says. Still, to move the stock market higher, investors will have to be convinced - all over again - that an economic recovery is just around the corner. It'll require "a new perception that the economy has come out of the muck and mire it's been in. Who knows when that will be?" says Goldman. HAVE INVESTORS LEARNED THEIR LESSONS? In any case, this time around, analysts say, investors won't be so easily sold. Says Tom Callahan, executive vice president at Yamaichi: "Right now, people are going back to the drawing boards and evaluating what kind of growth we're going to see over the next few quarters." Conservative investors will think twice about investing more money in the stock market. Low interest, after all, is better than losing money in stocks. Johnson advises clients to sell some stocks just in case. Most analysts contend that the recovery was nice, but none of the problems have gone away. Bonus Editor: Martin Baucom. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. 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