Economy Fine, Jobs Growing, But Markets Are Reeling

THE stock market is often perverse.

What seems like good economic news can be viewed as bad news for stocks and bonds. If more people get jobs, investors worry that it could be a harbinger of higher interest rates. And if consumer confidence soars, stock traders worry about inflation.

That's how it went last week as economic indicators brightened and the stock and bond markets nosedived.

For the week, the widely watched Dow Jones industrial average dropped a total of 138.77 points. The total market loss stripped away billions of dollars in market value. Many small investors in mutual funds called toll-free numbers to see how their investments were faring.

``We received a lot of calls, but the majority of investors are not taking any action,'' says a spokeswoman for the Boston-based Fidelity group of funds.

``Our customers are aware that the market has its ups and downs, and corrections are a normal part of the market,'' she adds.

The loss coincided with signs that the economy was continuing to grow. On Friday, the government reported that employment surged in March, partly because of the improvement in the weather.

This followed a report on Thursday by The Conference Board, a business research organization in New York, that showed help-wanted advertising rising.

``The economy is in good shape, jobs are growing,'' says Charles Plosser, dean of the William Simon Graduate School of Business Administration at the University of Rochester in Rochester, N.Y.

That is in fact Wall Street's concern - that the economy is growing too strong. On Friday, Merrill Lynch economists said first-quarter growth appears to be closer to 4 percent than the currently anticipated 3.5 percent.

And some analysts worry that the economy may accelerate in the second half of the year. ``There is a feeling in the bond market that we will make up for any lost economic activity in the spring months, or possibly telescoping into the second half,'' says William Sullivan, a senior vice president at Dean Witter Reynolds in New York.

Investors digested the higher-growth forecasts over the weekend. The stock market was closed for Good Friday. However, the bond market was open for a few hours, and long-term government bonds plunged 20 basis points, increasing their yield to 7.25 percent, up from 7.08 percent the night before. The stock market often takes its cues from the bond markets.

``My intuition is that stock prices will decline initially on the day when they open on Monday,'' says Brian Fabbri of Fabbri Global Economics. Whether the decline is steep will depend on how investors interpret the economic data. Mr. Fabbri says he expects the dollar to strengthen, which could help mitigate some of the bearish spillover from the bond markets.

A stronger dollar will also help ease some foreign concerns over the impact of the Whitewater affair. ``There has been a reduction in the confidence levels from foreigners vis-a-vis Whitewater,'' Mr. Sullivan explains.

The employment numbers, Fabbri says, justify Federal Reserve Board Chairman Alan Greenspan's decision to raise interest rates. However, Merrill Lynch argues the numbers were merely a rebound from weather-related weakness. Averaging the last three months shows unemployment to be growing by 207,000 jobs a month compared with 170,000 jobs a month in 1993.

Mr. Plosser argues that economic growth doesn't mean a return of inflation. He also says the economy will begin to slow down as wealthy individuals discover how much they owe in higher taxes. Unfortunately, this may not help the stock market. ``They will be selling stocks like crazy and sending the cash to Uncle Sam,'' Plosser predicts.

It remains to be seen if Mr. Greenspan is buying this argument. The Fed has voted to raise interest rates over its concern that the pace was ``above the economy's long-run potential.''

Greenspan is known for his detailed analysis of economic numbers. He closely follows auto sales, housing starts, and industrial production. Plosser points out, however, that Greenspan is also a master at disguising his future moves.

Since the Fed started raising interest rates, the market has been on a downward trend. Since its peak on Jan. 31, the Dow average has dropped 342 points, or 8.6 percent. It is not uncommon for market corrections to run 10 to 15 percent. ``It is not unusual that a boom in a stock market may taper off a little bit. I don't panic about these sorts of things; I will ride it out,'' Plosser says.

Other investors have been busy taking their losses in the financial markets, however. On Friday, the Wall Street Journal reported that speculator Michael Steinhardt admitted to losing $1 billion in the first quarter. Another group of speculators, Askin Capital Management, liquidated a large portion of its $2 billion in assets at a loss. Askin said it expected that a significant portion of its $600 million in equity capital would be wiped out.