Markets Rebound, but Volatility Still a Worry
Dow Rises 489 As Stocks Surge
By Steven Pearlstein and Ben White
Washington Post Staff Writers
Thursday, July 25, 2002; Page A01
U.S. stock prices yesterday staged their biggest one-day rally in nearly 15 years as Congress moved toward passage of a corporate reform bill, fears of a banking crisis evaporated and many investors concluded that a brutal two-month sell-off had gone too far too fast.
The Dow Jones industrial average gained 488.95 points, or 6.4 percent. It was the second-biggest one-day percentage gain since the rebound from the market crash of 1987, and the second-biggest point gain since the market peak of March 2000.
Trading on the New York Stock Exchange was the heaviest on record, with more than 2.7 billion shares trading hands.
The broad, powerful rally began only after the Dow had fallen more than 170 points on the opening bell, snapping back 667 points during the course of the day.
Other indexes also posted strong gains, with the Standard & Poor's 500-stock index up 5.7 percent and the tech-heavy Nasdaq composite index up nearly 5 percent. Bond prices fell as investors shifted money into stocks and hopes faded for an emergency interest rate reduction by the Federal Reserve [Story, Page E1.]
"The market simply reached an inflection point when people realized it had been oversold," said Rob Cohen, head of listed trading for Credit Suisse First Boston.
While celebrating the return of the long-absent buyers, analysts warned that such short, sharp upswings are common in the late stages of bear markets and don't necessarily mean that the 2 1/2-year market decline is over. Yesterday's rally left the Dow more than 400 points below its close of just a week ago.
"Nobody feels we're out of the woods yet," said Bernard Madoff, whose securities firm is a market maker for many stocks. "This would need to be sustained for a couple of days at least before you could even begin to say we've bounced off the bottom."
Richard Sylla, a market historian at New York University's Stern School of Business, said this period of market volatility is likely to extend well into the fall, with strong rallies alternating with more sharp declines.
Robert Hormats, a vice chairman of Goldman Sachs (International), worried aloud about the impact of the market's volatility not just on investors, but on consumers whose decisions to spend, or not spend, are likely to determine the strength of the current economic recovery.
"I think it's unsettling and bewildering to most Americans to see this thing bounce up and down like this, day to day," said Hormats. "There's nothing rational about it -- it's all about the passion of the moment."
Yesterday's wide swings in stock prices were not confined to Wall Street.
On the German stock market, for example, the benchmark DAX index at one point was down more than 7 percent in panicked selling on news of bigger-than-expected losses at key European firms, fresh signs of economic stagnation in Germany and fears that French and Swiss insurance firms were being forced to dump stocks to bolster their cash reserves.
But the DAX did an abrupt U-turn as news of the Wall Street rally began to cross traders' screens, ending the day up 3.3 percent. The rebound wasn't quite as dramatic in Paris, London or Milan, where leading indexes still closed down between 1.5 percent and 2.1 percent.
On Wall Street, the mood shifted quickly from fears of a meltdown to fears of being left out of the next bull market.
"Everyone was buying," said Todd Leone, head of listed trading at S.G. Cowen Securities Corp. Much of it started, he said, with computer-driven trading that kicked in when the declining Dow approached 7500. In time, the computers were joined by individual investors and mutual fund managers eager to pick up good stocks at bargain prices, along with pension fund managers sitting on mounds of cash. The final hours saw the arrival of short-sellers anxious to limit their potential losses on earlier bets that the market would continue downward.
One factor in the big jumps in the prices of some individual stocks has been the recent unwillingness of market makers -- the people who match buyers and sellers -- to hold inventory of falling stocks on their own books, out of fear that they would lose too much money. Without the benefit of that inventory, which in normal times smooths out movements in share prices, there were times yesterday when would-be buyers of stocks overwhelmed the numbers of would-be sellers, driving prices up in unusually large increments of 50 cents and even a dollar.
On Wall Street, traders said the biggest factor appeared to be the announcement by one of its leading firms, J.P. Morgan Chase & Co., that it had plenty of cash to weather the fallout from questionable transactions with Enron Corp. that were the subject of a Senate hearing this week. Standard & Poor's Corp., the credit rating agency, also took the unusual step of issuing a statement that rumors of a cash crisis at the bank were unfounded.
Those rumors had contributed to the sell-off earlier in the week, dragging down not only shares in J.P. Morgan but another Enron financer, Citigroup, and much of the market with them. After the fears were allayed, bargain hunters moved in to scoop up the bank stocks, sending shares of Morgan up 16 percent and Citi up 10 percent.
Analysts said investors also took heart from news that top executives of Adelphia Communications Corp., including founder John Rigas and his two sons, had been arrested on federal charges of looting the cable company of more than $1 billion.
Hours later, the market regained some of its lost confidence on news that congressional negotiators had reached bipartisan agreement on legislation creating a new oversight board for the accounting industry and tougher penalties for corporate fraud.
"The House and Senate finally getting together on this corporate clamp-down was certainly a factor," said Matt Johnson, chief stock trader at Lehman Brothers.
Drugmaker Merck & Co. also helped lead the advance, jumping 9 percent after saying it would increase dividend payments by 1 cent per share. After the market closed, Merck announced that it would buy back an additional $10 billion of its own stock, joining a growing list of corporations eager to buy back shares at depressed prices.
While some money managers suggest stock prices have finally returned to earth when compared with projected earnings, many skeptics remain.
Chris Wolfe, equity strategist at the J.P. Morgan Private Bank, said prices remain high, earnings remain depressed, and the economy was showing signs of slowing.
"We still have not resolved the underlying issues," he said. "This was a relief rally after a period of extreme pressure. For us to to start to see real sustained gains we are going to have to see improvement in the [economic] numbers."
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Best Regards, J.T. |
