Silly season not good for stocks
Enviado: 7/8/2003 22:36Cloned horses in Italy? Britney naked in a British magazine? Political skullduggery on Jay Leno's "Tonight Show" in California?
When these types of headlines pass for front-page news, you can tell the summer silly season is officially here.
But behind the scenes and off the radar of the vacation-going public, the story of the year could be brewing on Wall Street. Stocks are suddenly falling, bond yields and interest rates are rising, and a critical turning point is emerging for investors as the economy recovers.
The debate is on about whether this summer's stunning collapse in bond prices mirrors their declines in the summer of 1987, which eventually led to the stock market crash in October that year. But there is little doubt that the exciting gains in stocks in the second quarter have left the markets vulnerable to a correction. And what better time than in August, when nobody is watching?
According to The Stock Trader's Almanac, August has been the worst month for the past 15 years for the Dow Jones Industrial Average and the S&P 500 ($SPX), and the third worst month for the Nasdaq .
The Russian debt crisis and collapse of Long-Term Capital Management occurred in August 1998, causing a painful one-month bear market. And it was only 13 years ago that Saddam Hussein stunned the world with his invasion of Kuwait, which caused the markets to tank in 1990. If only investors knew then that Hussein would someday be scrambling around Baghdad in a dress with false eyelashes, hiding from his own people.
The declines on the Nasdaq and S&P of about 4 percent or 5 percent from mid-June and early July's highs aren't that significant just yet. They could be made up in little more than a few good trading sessions. And the Dow, at 9,061.74 at the close Wednesday, is really only a few hundred points off its recent high on June 17.
Not surprisingly, the declines have been led by the very companies that led the gains in the second quarter, such as the financial services companies, the Internet companies, the biotech companies and the wireless companies, according to the CBS MarketWatch Industry Analyzer. But with little to look forward to in terms of scheduled news over the next month, and nothing expected from the Federal Reserve Board's monetary policy meeting next week, investors are at the whims of lightly-traded market, where even small events could whipsaw prices and turn a moderate pull back into a freefall.
The full force of the bond sell-off has not yet been felt in the equity markets. At the moment, fund managers, traders and other large investors are eyeing each other suspiciously, wondering who might be the first to disclose a big loss in fixed-income trading.
If that occurs, the reaction will be swift and brutal. With bond funds down as much as 27 percent in the past six weeks, it's hard to believe that some of the big hedge funds or other institutional portfolios haven't suffered similar losses. Those losses can't be hidden from the market forever. So if they have happened we should find out about them sometime in the next two or three weeks.
Whether that's enough to put a full-blown damper on stock prices for the next several months or simply cause a short, sharp decline that paves the way for more gains in the fourth quarter remains to be seen. I'm optimistic that the economy is recovering slowly but surely enough to mean good news for stocks by the end of this year without a further blowout in the bond market.
But there is nothing over the next three weeks, including Arnold Schwarzenegger, Jay Leno and Britney Spears, that looks set to trigger a renewed stock rally back to June's highs. So have a good vacation and be ready for a wild autumn.
By: David Callaway
When these types of headlines pass for front-page news, you can tell the summer silly season is officially here.
But behind the scenes and off the radar of the vacation-going public, the story of the year could be brewing on Wall Street. Stocks are suddenly falling, bond yields and interest rates are rising, and a critical turning point is emerging for investors as the economy recovers.
The debate is on about whether this summer's stunning collapse in bond prices mirrors their declines in the summer of 1987, which eventually led to the stock market crash in October that year. But there is little doubt that the exciting gains in stocks in the second quarter have left the markets vulnerable to a correction. And what better time than in August, when nobody is watching?
According to The Stock Trader's Almanac, August has been the worst month for the past 15 years for the Dow Jones Industrial Average and the S&P 500 ($SPX), and the third worst month for the Nasdaq .
The Russian debt crisis and collapse of Long-Term Capital Management occurred in August 1998, causing a painful one-month bear market. And it was only 13 years ago that Saddam Hussein stunned the world with his invasion of Kuwait, which caused the markets to tank in 1990. If only investors knew then that Hussein would someday be scrambling around Baghdad in a dress with false eyelashes, hiding from his own people.
The declines on the Nasdaq and S&P of about 4 percent or 5 percent from mid-June and early July's highs aren't that significant just yet. They could be made up in little more than a few good trading sessions. And the Dow, at 9,061.74 at the close Wednesday, is really only a few hundred points off its recent high on June 17.
Not surprisingly, the declines have been led by the very companies that led the gains in the second quarter, such as the financial services companies, the Internet companies, the biotech companies and the wireless companies, according to the CBS MarketWatch Industry Analyzer. But with little to look forward to in terms of scheduled news over the next month, and nothing expected from the Federal Reserve Board's monetary policy meeting next week, investors are at the whims of lightly-traded market, where even small events could whipsaw prices and turn a moderate pull back into a freefall.
The full force of the bond sell-off has not yet been felt in the equity markets. At the moment, fund managers, traders and other large investors are eyeing each other suspiciously, wondering who might be the first to disclose a big loss in fixed-income trading.
If that occurs, the reaction will be swift and brutal. With bond funds down as much as 27 percent in the past six weeks, it's hard to believe that some of the big hedge funds or other institutional portfolios haven't suffered similar losses. Those losses can't be hidden from the market forever. So if they have happened we should find out about them sometime in the next two or three weeks.
Whether that's enough to put a full-blown damper on stock prices for the next several months or simply cause a short, sharp decline that paves the way for more gains in the fourth quarter remains to be seen. I'm optimistic that the economy is recovering slowly but surely enough to mean good news for stocks by the end of this year without a further blowout in the bond market.
But there is nothing over the next three weeks, including Arnold Schwarzenegger, Jay Leno and Britney Spears, that looks set to trigger a renewed stock rally back to June's highs. So have a good vacation and be ready for a wild autumn.
By: David Callaway