Stock market picks up this week
By ERIN LARUFFA
Asistant News Editor
Accustomed in recent years to record-setting highs in U.S. stock markets, American investors last week watched their stocks lose over $2 trillion.
Last week's overall drop in stock prices represented the worst ever in terms of a broad U.S. market index even when compared to the week of Black Friday in 1929, Newsweek reported in its lastest edition.
"It was a major correction," said Scott Malpass, Notre Dame's vice president for finance and chief investment officer. "It was a very short bear market."
After the tremendous losses last week, stock markets went up again at the beginning of this week. The Dow went up 276.80 points Monday and another 184.91 points Tuesday. Following a similar trend, the Nasdaq increased 217.87 points Monday and 254.41 on Tuesday. Other market indices such as the S&P 500 also increased.
Last week's losses seem to have lowered stock prices enough to enticed investors to buy stock this week.
"People who were courageous or daring … wanted to get in on the bargains," said economics professor Martin Wolfson.
Because money that is not invested does not earn interest, money people taken out of the stock market last week was not generating more wealth.
"Large investors decided over the weekend that there were bargains out there, and they can't just sit on their cash," said economics professor David Ruccio.
Despite this week's recovery, it is still significant that the Nasdaq dropped over 25 percent last week and the Dow industrials experienced its biggest one-day loss ever on Friday.
"It seems like people in the stock market are unsure of where to go with the money," Wolfson said. "It's indicative of … the general apprehension most serious investors have."
Indicative of investors' uncertainty is the fact that despite the overall increase in stock markets on Monday, more stocks lost money than those that made money, according to Ruccio. However, that trend was not repeated on Tuesday.
"We know that investors are nervous," Ruccio said, adding that investors will keep their money in stocks as long as they expect prices to rise. Once large investors begin to sell their stock, other large investors tend to follow suit, which is what occurred last week.
"Sellers follow it down and buyers follow it up," he said.
Friday morning's announcement of the most recent Consumer Price Index (CPI), which had increased more than analysts expected, may have contributed to losses at the end of the week. The CPI announcement along with the well-known fact that the Federal Reserve (Fed) is likely to raise interest rates again caused uneasy investors to sell stock, Wolfson said.
Despite other factors, the fear that stock prices are too high also affected investors.
"The underlying problem is that the markets have gone up so fast that many people think they're overvalued," Wolfson said.
Technology stocks were especially overvalued and "moved too high too quickly," according to Malpass. Many technology stocks – especially those belonging to companies that have not yet earned a profit – may be overvalued, he said.
"Technology stocks are the ones primarily in the Nasdaq market," Wolfson said. "All the tech stocks [were] getting hit on Friday."
The effects of the general decline in stock prices last week are different for different investors, Ruccio said.
"It all depends on the size of their portfolios. Some people lost money on paper," he said.
For example, the value of Bill Gate's portfolio dropped from $89 billion to $56 billion.
The losses big investors suffered last week will most likely cause a decrease in the purchases of luxury goods, such as third or fourth cars, Ruccio said.
The impact of stock losses is more significant to smaller investors than it is to people such as Gates with large portfolios.
"For a small investor, it took a big toll," Ruccio said.
Nevertheless, because the overall stock market has been strong for so long, most investors who have been in the market for a while have a positive net gain, Wolfson said.
"It's a large drop but … the average investor who's been in the market is still ahead," Wolfson said.
In fact, on Friday the Nasdaq was worth about what it was worth last November.
"Fundamentally, there's nothing bad in the economy," Malpass said, explaining that inflation and interest rates are relative low while economic growth and corporate earnings are strong.
Because of the currently solid economy, Malpass said he does not foresee a market crash.
"Long-term fundamentals are going to drive the market," despite short-term events like that of last week, Malpass said. "The fundamentals of the economy are as good as they've been in decades."
However, it is possible that the market is heading for a correction or crash, said Wolfson.
"I think it's too early to safely conclude that the correction is over," Wolfson said. "It makes you a little more apprehensive."
Investors should expect continued volatility in the markets, Ruccio said.
On the other hand, Malpass said he believes stocks will continue to do well over the next ten years, even if markets may not repeat the success they have had over the past 10 years.
"The last 10 years have been extraordinary," Malpass said. "It will have its ups and downs."
Because of those "ups and downs," it is important for investors to have diversified portfolios including U.S. and international stocks, as well as other types of investments such as bonds, Malpass said.
In order to keep inflation – and the economy in general – in check, the Fed will raise interest rates a few times throughout the rest of the year, according to Malpass.
The Fed has already raised rates several times this year.
All News Stories for Wednesday, April 19, 2000