Market has its downs but Greenspan drives it nuts


March 11, 1996|By BILL ATKINSON

THE DOW COULD use a dose of lithium to regulate its mood swings.

On Feb. 20, Federal Reserve Board Chairman Alan Greenspan hinted in testimony before Congress that the economy could grow at 2.5 percent this year.

The market gulped. Did Mr. Greenspan mean there would be no more interest rate cuts?

The ensuing speculation sent the Dow Jones industrial average down nearly 45 points for the day, and stocks posted their broadest decline in two months.

The next day, Mr. Greenspan delivered largely the same speech before the Senate Banking, Housing and Urban Affairs Committee, only he clarified his remarks saying that if inflation grows, rates might still be cut. This time the Dow jumped 57 points, while the Nasdaq reached an all-time high.

This is rational behavior?

"If you approach it [the Dow] on a random daily basis, then you might say it is quirky, or even nuts," said Larry Wachtel, a market analyst with Prudential Securities Inc. who has been following the market for 30 years. "It is a rational situation if you just give it time."

One theory says the Dow is an important economic indicator because it projects the future profitability of corporations. But the Dow's daily movements tell us little about whether jobs will be plentiful, whether wages will rise and whether the economy will improve slowly or quickly.

Yet, day-after-day newspapers, magazines and business news shows poke and prod the Dow like coroners conducting an autopsy.

What the coverage reveals is that almost any news can send the Dow swinging: unemployment figures, budget negotiations, interest rates, or the prospect of war.

In the long run, these sudden swings shouldn't matter to the average investor.

Jeffrey Rubin, market analyst with Birinyi Associates, a Greenwich, Conn., financial consulting firm, offers this advice: For long-term individual investors, don't pick up the paper every day and check the Dow.

"You will give yourself an ulcer," he said.

Here's why investors might be better off burying their heads in the sand.

The Dow represents just 30 stocks, but they are big names companies like Coca-Cola Co., Philip Morris Cos. and Woolworth Corp. Any one of these concerns can send the Dow bouncing like a jumper tied to a bungee cord by virtue of their size.

International Business Machines Corp., for example, was responsible for 18 percent of the Dow's 587-point gain from Jan. 10 through Feb. 23, according to Barron's.

"The volatility is starting to pick up, people have to get used to this," said Richard Russell, publisher of Dow Theory Letters, a newsletter in La Jolla, Calif.

Mr. Russell says a 50-point swing in the Dow used to be a big deal, but today it represents less than a 1 percent rise or drop. Even a 100-point move doesn't amount to much these days, he said.

The moves look "huge, but they are really not," added Rob Brown, market strategist with Ferris, Baker Watts Inc. "It's not a big percentage move."

Program traders also move the Dow in violent swings by buying and selling large blocks of stocks in one swoop with the press of a computer button.

Program trading accounts for about 15 to 20 percent of the Dow's daily volume, Mr. Wachtel said.

"Yesterday, we tracked the program that had an impact of 31 points," Mr. Rubin said Thursday.

Mutual funds, too, can jolt stocks by moving millions of dollars around the market at a moment's notice. Fidelity's Magellan Fund alone has $56 billion under management, and it can make and break individual stocks as well as markets.

But few can move markets like Mr. Greenspan. When he talks, everyone listens, including Andrew M. Brooks, who heads equity trading at T. Rowe Price Associates Inc.

"If a trader's job is eighths and quarters, it is really important to us what people say," he said.

On Feb. 21, Mr. Brooks was all ears for news on whether Mr. Greenspan was going to be reappointed to another term at the Fed.

"Were we trying to anticipate his reappointment and what that would mean to the stocks where we had orders? Absolutely," Mr. dTC Brooks said. "The gyrations for us, they very much impact what we are doing at the moment."

Traders' careers can be made or broken in split seconds, but the pressure is hardly that intense for long-term investors.

"What the investor should do is ignore the fluctuations, and focus on why they bought the stock," Mr. Wachtel said.

"Fundamental analysis will rule the day if you give it sufficient time."

Pub Date: 3/11/96

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