Stock market rebounds investor jitters remain

April 06, 1994|By Ian Johnson | Ian Johnson,Sun Staff Writer

Stocks hopped off their deathbed yesterday and danced an Irish jig, but market watchers were unsure if the exertions were proof of recovery or just a delirious last gasp.

Taking their cue once again from the bond market, which also rose strongly yesterday, stocks posted their largest one-day gain in nearly three years, with the Dow Jones industrial average of 30 big-company stocks leaping 82.06 points to 3,675.41. The rise easily erased Monday's 42-point loss, which saw stocks fall to their lowest point in six months.

Bonds also erased Monday's increase in interest rates, with the yield on the 30-year government bond dropping yesterday from 7.41 percent to 7.25 percent. Bond traders said they took comfort in a government report released yesterday showing that economic activity may be moderating after several months of strong growth.

The Index of Leading Indicators, which tries to predict economic trends six to nine months ahead, eased 0.1 percent.

After several reports showing a dramatically strengthening economy, the index's slight decline calmed fears that the economy was growing so strongly that it was stoking inflation.

Lower interest rates, plus a feeling that stocks had been oversold during the past few weeks, combined to boost stocks across the board. Besides the big stocks on the Dow, the Nasdaq index of smaller stocks rose 23.54 points to 750.95, its second-largest one-day increase.

The question that few were sure how to answer was whether the rally was sustainable.

After the market dropped nearly 10 percent since late January, analysts were wary of proclaiming that it had turned the corner. Although a 10 percent drop is typical of a "correction" -- a temporary hiccup in a rising market -- the market could also be entering a longer-term bear market. If that is the case, then yesterday's rally might be no more than the stock market equivalent of fool's gold.

"The rally was a natural reaction to several consecutive days of selling. After being so oversold it was bound to go up. But confidence is still eroded, so we'll probably see more down days before we hit bottom," said Robert von Pentz, chief investment officer at Riggs Investment Management Corp. in Washington.

Analysts have predicted for more than a year that the market has needed a breather from its 3 1/2 -year bull run because stocks have become extremely expensive. Part of the reason for the run-up in stock prices is that interest rates have declined, pushing investors' money into stocks because the low rates have meant that alternatives to stocks -- such as certificates of deposit or bank accounts -- have offered unattractively low returns.

But as the economy has shown signs of picking up steam, interest rates have begun to rise on fears of inflation. The clearest sign came in early February, when the Federal Reserve announced that it was nudging up short-term interest rates.

Since then, the bond and stock markets have been falling -- the bond market on fears of inflation and the stock market on worries that investors will take advantage of higher interest rates and put their money elsewhere.

Those on Wall Street who still believe that stocks will rise this year make the case that the bond market has overreacted to the fear of inflation. Wages are stable, raw materials are not increasing dramatically and statistics on inflation show it increasing only marginally.

If that scenario is true, then Wall Street's recent sell-off has been nothing more than a healthy correction. Once the bond market realizes that inflation is not likely to return -- as it seems to have yesterday -- then interest rates will fall and investors will return to stocks.

"Markets only really drop 20 or 30 percent when high inflation is imminent or when we're on the eve of a recession. That certainly isn't the case now, so I can't see the case for a long-term bear market," said Larry Keblusek of the Northern Trust Co. in Chicago.

Others see the recent downturn as a turning point in the stock market, with the 12-year upward trend turning flat for several years.

Yet virtually all investment counselors warned small investors against trying to outguess the market.

"Trying to be a market timer is extremely risky," said Anthony Brooks, chief equity trader at T. Rowe Price Associates. "If you had jumped out of the market on Monday, then you would have missed out on the upward spike."

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