PHILADELPHIA — Expect a change in leadership within the stock market that will favor blue-chip stocks over riskier investments, several market experts say.
Last week’s market volatility, which included the biggest one-day percentage decreases for the Standard & Poor’s 500 stock index and the Dow Jones Industrial Average since March 2003, indicates trouble ahead, they say.
On Tuesday, the S&P 500 plummeted 50 points, or 3.47%; the Dow industrials fell 416 points, or 3.29%; and the Nasdaq Composite Index dropped 96 points, or 3.86%.
Some financial advisers found themselves fielding questions from nervous clients asking them if it was the beginning of a
recession.
“I probably had a half-dozen calls or e-mails,” said Richard Schroeder, executive vice president of Schroeder Braxton & Vogt Inc., a financial advisory firm in Amherst, N.Y.
Although he didn’t get as many calls, Armond Dinverno, a financial adviser and co-president of Balasa Dinverno & Foltz LLC in Itasca, Ill., still had to address the issue.
“I had a client meeting [Tuesday], and the client asked what were we going to do?” he said.
Mr. Dinverno told clients that he would continue to watch the situation but that he didn’t think that last week’s volatility was a precursor to disaster.
Flight to quality
The downturn may have been a sign that riskier investments are about to lose favor, however, several market experts said.
“We think the economy is slowing, and when that happens, you want to own higher-quality stocks,” said Jeff Schappe, chief investment officer of BB&T Asset Management Inc. in Raleigh, N.C., a subsidiary of BB&T Corp. in Winston-Salem, N.C.
Lower-quality, small-cap stocks have been outperforming for some time, but last week’s volatility may get investors to realize that “risk doesn’t just bring higher return,” he said.
That realization will spark a “trend” that favors high-quality investments, said David Spika, an investment strategist with Westwood Holdings Group Inc. of Dallas.
If investors stick to such investments, they should do fine, because despite the market drop last week, market fundamentals still are strong, he said.
Mr. Spika attributed much of last Tuesday’s downturn to outside forces, the most influential being China. Chinese stocks plunged 9%, and that got the ball rolling downhill, he said.
That was followed by bad news regarding real estate loan delinquencies, a report from the Department of Commerce that durable-goods orders fell more sharply than anticipated in January and even news that Vice President Dick Cheney had been the target of a bomb in Afghanistan.
Also weighing on the markets were Alan Greenspan’s comments the previous day that a recession is possible by the end of the year.
But the former
Federal Reserve Board chairman’s comments were taken out of context by the media, said Charles Lieberman, strategist and chief economist with Advisors Financial Center LLC in Paramus, N.J.
Mr. Greenspan was asked if he thinks that a recession is possible, Mr. Lieberman noted.
“What was he supposed to say? A recession is impossible?” Mr. Lieberman said. “That makes no sense.”
Other industry experts agreed that Mr. Greenspan’s comments were overblown.
A bumpy ride?
“If you read exactly what he said, he said there was some chance of recession,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management Inc. of San Francisco. “Well, when is there not some chance of recession?”
The markets may be in for a bumpy ride, but investors shouldn’t expect a recession, Mr. Paulsen said.
Federal Reserve Chairman Ben Bernanke seemed to bolster that view Wednesday when he told Congress that he thinks the U.S. economy will continue to grow moderately.
Meanwhile, some observers actually are happy about the market’s performance.
If anything, last week’s volatility was a good thing, said Rob Sellar, head of North American equities for Aberdeen Asset Management Inc. of Philadelphia, a subsidiary of Aberdeen (Scotland) Asset Management PLC.
It took some of the “speculative froth” out of the market, he said.
“I’d rather let the steam out of the market before letting the steam out becomes painful,” Mr. Schroeder said.
And that had been expected by many industry experts for some time.
“The U.S. market was vulnerable to any adverse shock, because it had gone up eight consecutive months,” Mr. Lieberman said, adding that the swift correction still was somewhat surprising.
A change in market leadership, however, makes sense, he said.
But some financial advisers disagree.
To a large extent, what happened last week had to do with China, said Rick Miller, chief executive of Sensible Financial Planning and Management LLC of Cambridge, Mass.
That could mean that fewer investors will be willing to invest in China, a market that has been red-hot over the past year, he said.
But it doesn’t necessarily mean that investors will change their behavior toward other investments, Mr. Miller said.
“It’s as much to me a comment on the Chinese market,” he said. “It’s still not as well integrated as other emerging markets.”
However, based on just a few days’ worth of data, “it’s hard to draw too many conclusions,” cautioned Stephen Gorman, president of Gorman Financial Management Inc. in Hingham, Mass.
By Friday, the indexes had fallen a bit further from Tuesday’s close. The S&P 500 closed at about 1,387, the Dow at about 12,114 and the Nasdaq at about 2,368.
