Swaying to the boom-bust-boom beat. Market still fluctuates six months after the plunge
Last year's stock market plunge was notable for its volatility and severity: a dramatic 508-point dive that suggested the threat of recession, or worse, as comparisons of 1929 quickly became the order of the day. Yet, six months after Oct. 19, the United States has avoided an economic downturn. No recession is in sight. Nor can it be said that 1987-88 has been a repeat of 1929, although the market's technical performance has somewhat resembled gains in the market in the spring of 1930, before beginning a downward momentum that was not fully reversed until World War II.Skip to next paragraph
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Volatility remains the order of the day, underscored by last week's unexpected negative report on the US trade deficit and the subsequent plunge in the market. The trade deficit widened in February, to $13.8 billion, a $1.4 billion increase from January.
Both stock and bond prices quickly fell on the news Thursday, with the Dow Jones industrial average falling 101.46 points over concern that interest rates would climb. By late afternoon the New York Stock Exchange had imposed a suspension on computerized program trading, the second time it had done so since October.
For the week, the Dow closed at 2,013.93, down 76.26 points.
Are there similarities with last October? Yes, says Robert A. Brusca, chief economist with Nikko Securities Company International, in New York. ``At least this time there was a collar on program trading,'' he says, adding that the upward momentum on the market ``has been arrested, incarcerated, and put in prison.''
The financial market has been characterized by a ``boom-bust-boom-bust-boom'' attitude since late last year, says Philip J. Roth, an analyst with Shearson Lehman Hutton Inc. After the October plunge - in which that month's trade deficit was believed to have been a key factor leading to the market dive - the outlook was bearish, Mr. Roth notes.
After a rally in December the outlook became bullish, but in January, there was a shakeout in the market and the bears strode back. Then came spring and an good gain for the market, with the dominant view once again positive. ``But investors have very little confidence in the market environment and the economic environment,'' Roth says.
``One bad economic situation,'' he adds, ``and investors will think the boom is over.'' Is the February trade report such a ``bad situation''? For the moment at least, Roth says, ``the jury is still out'' on the full implications of the latest trade numbers.
``The trade deficit resulted from a big increase in imports. That's a sign of economic strength,'' he maintains. He says that the February numbers ``are disappointing, but it would be premature to see a month of increased imports'' as creating the type of climate that would necessarily send the market downward for any protracted period of time.
Clearly, looking beyond short-term variables such as the February trade numbers, the repercussions of Oct. 19 have been fairly pervasive:
Within the financial community, there have been massive investment house layoffs - an estimated 15,000 people - as the houses retrenched or consolidated.
Thousands of smaller investors have pulled out of equities for other forms of investment.