both its biggest one-day point loss and biggest one-day gain last week, dropping about 10 percent in midweek before making almost half of it back on Friday. This lunatic lurching is an example of not only how nuts the market is, but how fragile some of its favorite stocks are.
Let me explain. Even though the market is a multitrillion-dollar beast, all it takes to send the broad indicators soaring–or sinking–is big moves in a few dozen stocks. Last year, for instance, more than 40 percent of the Nasdaq stocks were down, even though the Nasdaq composite was up 86 percent. A mere 16 of the 5,000-plus Nasdaq stocks accounted for 40 percent of the index’s total gain, according to Aronson + Partners, a Philadelphia money-management firm. Many of last year’s favorites got smacked last week, if only briefly. Why? In my humble opinion, for some of the same reasons that ran them so high in the first place: emotion. Because, you see, there’s not much decent analysis of profits or cash flow or any of the other things that investors used to consider important. Especially in Internet-related stocks, pretty much everything is on faith or buzz or chat rooms or reactions to whether you think everyone else is buying or selling. When you’re running mostly on emotion, Fragility Flu is especially potent.
As Nasdaq stocks plunged in midweek, the usual suspects produced the usual rationalizations: “profit-taking,” which is presumably different from regular old selling; tax-motivated sales, as if people would sell stocks they thought would continue rising; projected interest-rate hikes, as if the ultraspeculative companies running the market sell on the basis of today’s value of projected future profits. What I think happened is that selling started in New York Stock Exchange shares Monday and spread to Nasdaq Tuesday for whatever reasons. Then the selling took on a life of its own, and everyone sold. This is the downside of so-called “momentum investing,” whose practitioners buy stocks because they’re rising or sell them because they’re falling. We had a melt-up in November and December, a brief midweek meltdown last week and a Friday melt up. All of which, by the way, came more or less out of the blue.
The big shocker was Lucent Technologies, a mainline company that makes serious profits and manufactures stuff that Internet companies buy by the ton. Lucent plunged 28 percent Thursday–almost all of it in after-hours trading–after warning profits would be lower than expected. Chairman Richard McGinn apologized, but more than $60 billion of stock-market value was wiped out in a day. The whole episode is an example of how blind faith ran the nation’s most widely held stock up only to have emotion crash it. Then Friday, amid fears the “Lucent Effect” would vaporize stocks, Lucent rose a tad, the market soared. Go figure.
I’d also bet that fear of fragility helps account for President Clinton’s decision to choose Tuesday to nominate Alan Greenspan for another term as Federal Reserve Board chairman. Look: whatever you think of Clinton, his major domestic legacy is a strong stock market and a strong economy, which are interlinked as never before. He sure doesn’t want the market tanking, especially with his wife and his vice president running for higher office. Clintonistas say the timing was accidental. But having Clinton trot out Greenspan’s renomination on a huge down day was a nice home remedy.
Given the fact that the broad market indicators closed the week at or near their all-time highs, why bother discussing fragility? Because for a couple of days last week, we got a clear look into the abyss, which wasn’t very pretty. And because thinking that all short-term market moves are rational is a good way to get your head handed to you.
