Expect More Dow Swings

Call it the Tarzan stock market: Despite big swings, it always seems to land on its feet.

This year the Dow Jones Industrial Average has careened with a volatility straight from the jungle. During almost 1 of every 3 trading sessions, the index has risen or fallen by at least 1 percent, frequently with daily swings of more than 100 points.

On Tuesday, the Dow rocketed 257 points. But that followed a 265-point loss the week before.

Despite its wild ways, the market has treated average investors well - up 22 percent in 1997. With inflation subdued and corporate profits strong, many analysts see no reason to call an end to the good times on Wall Street.

"The bottom line is that economic performance is at a near-perfect level, and there's nothing apparent that would seem to change that any time soon," says Peter Cardillo, at Westfalia Investments in New York.

"This is a Benny Goodman market - There's lots of swing," says Alan Ackerman, market strategist at Fahnestock & Co. in New York.

At the same time, however, a number of analysts worry that the market has outrun the economy.

"This market is priced for perfection," says one. "If we don't get perfection, then stocks could take a real beating."

Volatility could strike especially hard today as the government reports on employment for August. The job figures offer a leading clue to inflationary trends - and to whether the Federal Reserve will raise interest rates later this month.

After today, volatility should continue for both passing and long-lasting reasons, say investment analysts.

Investors will probably continue to sell, impulsively, on any hint of inflation. Before its big rebound Tuesday, the market had fallen 7.71 percent from its Aug. 6 record high, in part because the strike at United Parcel Service stirred inflation anxieties about higher wages.

"The UPS strike showed us that with tight labor conditions, we might see strong wage pressures," says Greg Seto, senior economist at Nikko Securities International in New York.

"I think volatility is to be expected going forward for the next couple of months," says Mr. Seto. "A lot of people are suspicious that inflation may accelerate, and until that suspicion is proven or diminished, we will see the market seesaw," he says.

Investors will be especially jumpy about any economic blemish that could compel the Fed to raise rates to slow an overheated economy.

Inflationary anxieties flare even though expanding global trade and investment are restraining costs. Since the fall of the Soviet Union, US companies have kept price increases to a minimum because of greater access to cheap foreign labor and stiffer competition from foreign firms, says Alfred Goldman, director of market analysis at A.G. Edwards in St. Louis.

Investment analysts say the Wall Street whipsaw will probably continue because:

Arbitrageurs have become more active. Stock prices are now quoted in 16ths rather than eighths, and that expands the number of stocks vulnerable to arbitrage, which involves making quick profits from stocks that are priced differently from one market to the next.

Foreign investors can increasingly flood or flee the market, thanks to a steady removal of barriers.

The Dow's roughly 2,000-point rise between April and August shocked investors and made them skittish about losing their ample paper profits.

Ironically, investors may take some comfort from the commotion. The big swings signal a healthy - if nerve-racking - market. The erratic closing figures suggest that most investors lack the bane of every equity market: complacency.

"Overall," Seto says, "the volatility is a good sign of healthy caution."