Investors Wonder What Is Next After a Wild Ride on Wall Street
By GRETCHEN MORGENSON
There was sound. There
was fury. But what
stock market investors wanted
to know after yesterday's
frightening bungee jump in
share prices was, what does it
signify?
Midway through one of the
weirdest and wildest days in
stock market history, the
technology-laden Nasdaq
composite index had plunged
574.57 points from its close
the day before, shearing 13.6
percent off its value. Had it
ended there, it would have
been the worst one-day
decline in Nasdaq history. But
a flood of buying rescued the
index, propelling it up almost
500 points, to close with a loss of only 1.77 percent on the day.
As the Nasdaq plummeted, the more established gauges fell alongside it.
About 1:15 p.m., the Dow Jones industrial average had fallen 4.5 percent
and the Standard & Poor's 500-stock index had lost 5.9 percent. But
these gauges bounced back as well, with the Dow closing the day down
0.51 percent and the S.& P. 500 ending with a loss of 0.75 percent.
Even though the markets recovered by the end of the day, traders and
investors were shellshocked by the extraordinary moves. Ten- and
15-point trading ranges were commonplace among even established
companies like American Express, Intel, General Electric and Cisco
Systems.
The selling seemed to represent the first serious threat to the
all-technology all-the-time market investors have come to love.
Technology stocks have dominated investors' psyches in recent years
and have been responsible for titanic gains among those buyers willing to
suspend their disbelief about what the future may hold for these
companies. As a result, investors bid up the prices of both untested
companies with no sign of profits and established companies with
enviable earnings growth to levels that were never seen before.
"These stocks are trading on psychology, and ultimately markets are
efficient," said Edward Kerschner, chief market strategist at
PaineWebber. "Our view is that part of the excesses have been
corrected, but not all of them." Mr. Kerschner thinks that the 20 most
popular technology stocks with no earnings, like Amazon.com and
Juniper Networks, have to go down another 40 percent before they can
begin to be considered for purchase.
Many strategists think yesterday's mood shift among investors has staying
power. "Panic is setting in among people who have big gains," said David
Eidelman, money manager with Eidelman, Finger & Harris in St. Louis.
"At first, when stocks go down, you have complacency among investors.
Then people start to wonder, 'Can I lose everything I've made?' In a lot
of these stocks" with high price-to-earnings ratios, "you don't really have
a comfortable feeling for where the bottom is."
The upheaval in the market yesterday acted to level out some of the
peaks and valleys seen in the main market gauges this year. The Nasdaq,
which had been up 28 percent at its March 10 peak, is now up 1.96
percent on the year after closing yesterday at 4,148.89, down 74.79
points. The Dow, which had lost 14.8 percent in early March, is now
down only 2.89 percent this year.
Brokers said that yesterday's selloff accelerated when calls for additional
money went out from brokerage firms to their customers who had
borrowed to buy shares.
One employee at a large online brokerage firm who declined to be
identified said the firm made a record number of margin calls yesterday,
four times what is typical. Almost none of the customers put up the
additional money, this person said, and were therefore forced to sell
some or all of their holdings. This accelerated the declines in already
weak stocks.
Seeking cover from the carnage in stocks, investors fled to the traditional
safe haven of United States bonds, driving their prices up. The yield on
the benchmark 30-year bond, which moves in the opposite direction
from it price, fell as low as 5.65 percent from 5.81 percent on Monday
before finishing at 5.77 percent.
Over the last two sessions, the Nasdaq composite index has lost 9.3
percent. While it remains up 1.96 percent on the year, it is down 17.8
percent from its March 10 peak. Volume was heavy. More than 1.5
billion shares changed hands on the New York Stock Exchange, the
biggest day ever. It was also the busiest day on the Nasdaq market.
While the rout in the Nasdaq got started early in the day, the Dow and
S.& P. 500 held up until late morning. Then, traders said, large investors
began to experience trouble getting out of their Nasdaq shares and
started selling the stocks they could. This meant many of the big stocks
that make up the Dow and the S.& P. 500.
"The institutions we deal with are extremely
calm, but they're frustrated because there is
a ton of volume, but no natural liquidity,"
said Bill Schneider, head position trader at
Warburg Dillon Read. "To some extent we
have seen some buyers. But buyers who
have bought the dip are a little more
cautious this time, particularly in Nasdaq."
One of the reasons for the lack of liquidity
in Nasdaq stocks is that the traders acting
as market makers in these shares are only required to buy or sell 100
shares at their specified price. In the 1980's, market makers had to buy
or sell 1,000 shares at their quoted prices.
A market maker acts as an intermediary, facilitating the buying and selling
of stocks between investors and stepping in when others are unwilling to
buy and sell.
As a result, traders said that many dealers yesterday bought 100 shares
from a customer, as they were obligated to do, and then posted their next
price so far below the prevailing market that few investors would be
interested. This essentially guaranteed that dealers would not be stuck
buying shares in a falling stock. Traders also said that the differences
between what dealers were willing to pay for a stock and what they were
willing to sell it for -- called the spread -- widened significantly as the
Nasdaq plummeted, driving away all but the most desperate investors.
While yesterday's gyrations in the Nasdaq broke records, they are a
continuation of extreme swings seen in that market for months.
"In January and February, 70 percent of the trading days qualified as high
volatility moves of 1 percent or more, day to day," said Steven Leuthold
of Leuthold Weeden Research in Minneapolis. "In March, we probably
kicked this up to 75 percent of trading days, the highest we've seen in the
history of the Nasdaq index." As for the broader market averages that
have been around longer, volatility is higher than it has been since the
1930's.
Mr. Leuthold said that in addition to being unprecedented, the swings
were scary. "High volatility normally indicates a market in transition" he
said, in this case further toward a bear market. "I wouldn't be surprised if
that is the message we're getting right now."
Unfortunately, the increasingly volatile Nasdaq is where many investors
have placed their bets. According to AMG Data Services, more than half
of the $113 billion investors have put into mutual funds this year has gone
into those that specialize in technology stocks and higher-risk shares.
"This is the most focused the flows have ever been," said Robert Adler,
president of AMG Data Services. "The point is technology and all bets
are pressed."
In addition, technology stocks have become much more popular among
hedge funds, investment vehicles for wealthy individuals. According to the
Hennessee Hedge Fund Advisory Group, new capital earmarked for
technology funds this year is four times the capital going into the average
hedge fund.
Peter Schwab, director of shareholder communications at Strong Funds
in Milwaukee, reported that investors who called into the fund's
headquarters were concerned but not panicked. Those who did sell
shares shed technology funds and went into safer, but less lucrative,
money market funds, he said.
One trader said that when Nasdaq had given up all of its gains for the
year yesterday, the selling seemed to increase, reflecting the desire of
investors to keep the market's rout from cutting into 1999 gains. Further
selling pressure in Nasdaq stocks likely came from executives of
companies that recently went public eager to nail down some of their
gains. Because these executives typically agree to hold off selling months
after an offering, selling pressure does not emerge for a while.
Now, however, many of these so-called lockup periods are expiring and
stock is coming on to the market. Indeed, according to Sanford C.
Bernstein & Company, a research firm in New York, over the last two
weeks stocks with coming lockup expirations are down more than 24
percent, almost three times the overall Nasdaq's decline.
The good news in yesterday's decline, some strategists said, is that it
could ease some of the Federal Reserve's worries about increasing
demand for goods driven by an overheated stock market. "We think this
decline in the stock market, if it persists, could change the Fed's thought
process radically," said Richard Rippe, chief economist at Prudential
Securities. "The plunge today is serious enough that any thought of wealth
driving the economy is going to be tempered at a minimum, and unless
there's a reversal right away, the Fed is more inclined to be more mild
with their actions."
Jeremy Siegel, professor of finance at the Wharton School of the
University of Pennsylvania and author of "Stocks for the Long Run,"
argued that yesterday's move was healthy because it took some of the
speculative fever out of Nasdaq stocks.
"This should surprise no one," he said. "There's no way you can make
these valuations reasonable. When you have that sort of market, when it
finally falls you get tremendous gaps."
Some investors who have watched the technology craze from the
sidelines see a return to sanity among investors.
"We sense some sort of balance may be coming back into the market,"
said Anthony M. Maramarco, portfolio manager for the Babson Value
Fund in Cambridge, Mass. "Gradually, people will come to their senses
and realize that there's more out there than just technology."
"The market is fundamentally strong," Professor Siegel said. "But I think
there's going to be a lot of unfulfilled hopes and expectations among
people who thought they were entering the new world and are now
finding it's a pretty harsh reality." |
