Thunk! ... Thunk! ... Thunk!"
Call it the pile-driver market: The price of equities these days slides up only to slam down soon thereafter. It's a jarring ride for investors who hoped the market's seven-year balloon ride would go on and on.
Expect the volatility to persist. Although the economy remains vibrant, new uncertainties will hammer at the bull market for months. Investors should let go of the halcyon past and expect "fair" rather than "superb" market returns for 1998, equity analysts say.
"This will continue to be a volatile period because we are on the cusp of change in so many areas: internationally, politically, in corporate earnings, and inflation," says Hans Stoll, director of Vanderbilt University's financial-markets research center in Tennessee. "There is a greater range and depth of uncertainties than last year."
The performance last year of the Standard & Poor's index of 500 stocks suggests what is to come. Three times in 1997 the index fell at least 5 percent, compared with once in 1996 and not a single time in 1995. Another measure of volatility - the standard deviation of daily moves - last year reached its fourth-highest level since World War II.
Such wild zigzags often herald a broad market downturn.
So far, investors have stayed confident and stayed in the market, taking the poundings in stride. Since a market peak in August, shareholders have responded to each plunge with a buying spree that sustains the Dow Jones Industrial Average within a broad, 600-point range.
After the 11 percent decline in the S&P 500 Index in October, investors lifted the market to a record high in little more than a month. In contrast, the index over the course of this decade has taken an average of three months to recover from a declines of 5 percent or more, according to Standard & Poor's data.
Several uncertainties will test the market's lunar-gravity bounce. Beyond six standard factors, investors must cope with a slowing rate of corporate-earnings growth at a time when stock prices are already very high in proportion to earnings.
Many firms, from rising high-tech stars to blue-chip stalwarts, have had their 1998 earnings prospects badly dimmed in recent weeks.
"As far as the eye can see, the US economy looks great. But the weak link is that the lofty value of the stock market depends on solid growth of earnings," says Cary Leahey, chief US economist at High Frequency Economics in Valhalla, N.Y.
The earnings outlook is troubling. High employment levels put upward pressure on wages, thereby squeezing profits. And the financial turmoil in East Asia is especially needling US companies.
With many Asian currencies badly depressed, US firms face stiff import competition at home and hobbled exports abroad.
The crash of mythic East Asia, the economic juggernaut once thought invincible, has investors backpedaling from other possible delusions.
There is much less talk these days about how technology and global competition are ushering in a "new era" of rising productivity and prosperity.
Euphoria over the slaying of inflation has given way to anxiety over the specter of deflation.
And allegations of adultery and perjury against President Clinton have fanned political uncertainty.
Still, many investors apparently count on the generally healthy economy to yield mild stock-market gains for the year. "People have confidence that any decline in the market will surely be reversed," says Robert Shiller, a professor of economics at Yale University in New Haven, Conn., who has studied investor psychology for more than a decade.
But will that confidence hold up?
For an answer, analysts say investors would do well to watch not just earnings and Asia but also consumer confidence and the high-tech industry, bellwethers of both the market and the economy.
Consumer spending has been solid, but an index of confidence in the economy just took its sharpest one-month drop since 1990 - when the nation was entering a recession. Technology stocks confront big obstacles, including Asia's slump, slowing computer sales, and a glut in hardware.
Investors must also beware of the unexpected - a possible war with Iraq, for example. "Until last summer, the markets had priced in the best of all possible worlds," says economist James Coons of Huntington National Bank in Columbus, Ohio.
For investors who want to wait out the volatility, analysts offer the following suggestions:
* Mutual funds that hedge, or devote a portion of their portfolios to short-term trading and short sales.
* Bonds. The yield on the 30-year Treasury bond drifted below 6 percent late last year and is expected to fall further in coming months, making bonds a lustrous high-return, low-risk option.
* Stocks with steady earnings in promising industries. These sectors include food, health care, utilities, and real estate investment trusts.
Where's The Risk?
Financial folly in Asia, White House scandal, Iraq - unexpected events can slam a portfolio. Investors can't anticipate them, so experts suggest monitoring six longer-term risks:
1. Interest Rates: Rising rates usually hurt stocks and bonds.
2. Credit: Bond issuers might not be able to pay up. Stay with high-rated issuers.
3. Company: Don't tie your fortunes to one stock or bond: diversify, diversify, diversify.
4. Industry: Same as above.
5. Market: Investor emotions can cause wild market swings; diversify overseas and into various investment vehicles.
6. Economic: Even dream economies slip into recession.