Simmer down, Wall Street

ON a couple of occasions lately, we have emphasized the need for the financial markets to avoid overreacting, especially to individual statistics. The message evidently hasn't gotten through yet.

The Dow Jones industrial average dropped more than 100 points last Thursday, in response to the release of a larger-than-expected trade deficit figure.

The drop was largely understood as an overreaction, but also seen in some quarters as ``psychologically damaging.'' Mindful of the telephone overload last October, some presumably sought to bail out while they could still get their brokers on the phone.

Even for those who want to peg their entire investment strategy to a single set of statistics - as so many seem to - the trade deficit figures may not be the best ones to follow.

And even when we've seen solid good news on the trade gap, observers who expect an overall narrowing of that gap by year-end have warned that some months would be better than others. Each month's figure can't be expected to be smaller than that of the month before.

Moreover, there is little preliminary information available on the monthly merchandise trade figure, which makes that hard to predict. And the trade deficit is not adjusted for inflation or seasonal factors.

At this period, investors need to keep a particularly careful eye out for several factors to help them decide where to put their money. Thursday's drop should not have been unexpected. The market had been posting steady gains for some time - gains that cannot have continued to be supported by fundamentals.

The October stock-market plunge has not (yet) precipitated a recession; it may not, ultimately. Despite a wave of concern about inflation, caused by last week's release of producer price index figures, good economic news continues to come from several fronts.

But the situation on Wall Street has changed. A year ago, everyone was in the stock market, and so the stock market was the place to be. That is, sheer demand for stock kept pushing stock prices higher, and the higher prices went, the more people bought because they saw an opportunity to make money - and little risk of losing it. These two mutually reinforcing impulses helped push the market to a peak in August, and then we all know what happened Oct. 19.

Nowadays the stock market must compete for dollars with other investments, and those who would manage their money wisely should look carefully at companies or mutual funds to see how they are run - fundamental analysis, in short.

The investing public may have to learn to live with a certain volatility. Of course, as the Dow Jones numbers rise, a one-day drop of, say, 100 points becomes proportionately less significant.

But more than ever, individual investors should surely continue to think in terms of the long haul rather than the short term. This means not only hanging on longer to stocks of individual companies but investing in mutual funds, which ``churn'' their portfolios less frenetically. The new tax law, with its higher capital-gains rates, makes this all the more important.

You've read  of  free articles. Subscribe to continue.
QR Code to Simmer down, Wall Street
Read this article in
QR Code to Subscription page
Start your subscription today