Economic uncertainty breeds market volatility

SUNDAY OUTLOOK

June 04, 1995|By Kim Clark

Stocks soared last week, rolling up their biggest advance since 1992. Analysts said investors were buying on news of improving corporate profits and hopes that the economic soft landing was about to touch down.

But in the two weeks just prior to that, the stock market tumbled, at one point registering its biggest one-day decline this year.

Analysts said investors were selling because of fears that corporate profits would weaken and that the economic soft landing might be veering off the runway.

One day, inflation is dead. The next, it's back and it's angry. One day, your investments flop. The next day, you're rich.

Is this part of some previously undisclosed summer effect? Or just another step in the random walk down Wall Street?

Thomas E. Myers

Equity portfolio manager, Aegon USA

In the past, the market has gotten kind of quiet in the summer time. But recently, the summers have tended to be just as volatile as any other time of year.

zTC I would expect volatility to increase as we get later into the stock market advance which started in November of 1994. The longer it goes, the more emotional it gets. Some people have the feeling they are underperforming the market and have to get money invested. Other people look at the market and say it can't continue up week after week. That makes the sell-offs pretty aggressive. And at a little bit of good news, everybody is falling all over themselves to buy.

This is somewhat reminiscent of the summer of 1987. There was real volatility in August of 1987. This bull market started in the first quarter of 1991 and we haven't had a 10 percent correction since then.

But I think this market is going higher because there are guys out there still thinking it could go lower. Unlike the last time, people are worried, and that's why it can keep going higher.

Dave DiPietro

Managing director, Equity Transactions Group, Alex. Brown & Sons Inc.

Looking back over the last five years, the volume of the first five months of the year tends to be more active than in June and July. But in most of these years, by the middle of July volume picks up. It is hard to generalize about any trend during the summer.

The reason for the current volatility is that opinion is very mixed over whether or not the economy is slowing down at just the right pace or too much.

What began to happen last week was that corporate earnings numbers indicated the slowdown was not too severe.

The portents for the summer will be more volatility until we're more certain about what the true level of economic activity is.

As a firm, Alex. Brown focuses much more on industries and individual companies, so we are focused on the trends in corporate earnings. The next real data on that is six weeks away.

The initial public market this year has been dominated by technology offerings to a greater extent than I've ever seen. And a big part of that will be driven by how technical stocks do.

Those stocks have been especially volatile recently. The reason people are so jumpy is that institutional portfolios are so heavily weighted in the technology sector right now. No one wants to be stuck holding the bag. They don't want to see enormous paper profits eroded. And whenever they sense a change, there is a lot of stock for sale at one time.

We're scheduling IPOs in July and August because we think there will be more than sufficient audience. We won't be able to go on vacation then, but we go on vacation during bear markets.

John A. Haslem

Professor of finance, College of Business, University of Maryland

During the 1980s a study found that the stock market was no more risky than it had been in the previous decades from World War II to the present. There were more extremes -- stocks tended to go up and down faster -- but in general, volatility has remained pretty consistent.

I think a similar pattern will continue. People react more quickly to information. We are going to get those spikes more frequently.

So we'll see more of the same.

The problem now is that some indicators, such as earnings and (( interest rates, are doing very well, but some technical indicators are not looking very good.

If you look at price-to-earnings ratios, the market is selling only at 14 times earnings. That is very much at the middle of the range. Normal is 13.5. The economy is slowing and there is less pressure on interest rates and inflation. And corporations are reporting good earnings.

So the fundamentals look good. But on the technical aspects, it is not as good. The Zweig sentiment index, a survey of investors, for example, is in a bearish region.

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