If a market ever needed a cold shower, the U.S. stock market is it. Greed, never in short supply, has been altogether out of hand. Check the symptoms: mom-and-pop investors paying ridiculous prices for shares in untested companies that promise to mine the Internet. The cover of Money magazine touting ways to DOUBLE YOUR MONEY BY 2001, while competitor Kiplinger’s trumpets a DOW 10,000. Respectable stock analysts arguing that the growth of self-directed retirement plans, such as 401(k)s, has turned the equities market from a risky, unstable casino into a perpetual money machine. When euphoria becomes a technique for picking stocks, a month like July can offer a bit of desperately needed perspective. So your stocks took a hit? Nobody promised you a rose garden-or if they did, you should’ve known better. “We went up 56 percent in a year and a half,” says Ralph Acampora, analyst for Prudential Securities. “A lot of people forget that.”
Wall Street clearly has a case of the nerves. The Nasdaq Stock Market, home to many high-tech stocks, has racked up four of its seven worst trading days ever since the second week in July and is off 14 percent in two months. Soothsayer Elaine Garzarelli, famed for turning cautious just before the crash of 1987, unexpectedly turned from an unrelenting bull into an unrepentant bear last Tuesday–albeit after the Standard & Poor’s 500 Stock Index had already dropped about 7 percent from its May 24 peak. Mutual-fund buyers, who poured more money into stocks so far this year than in all of 1995, may be growing anxious, too. Investors moved barely half as much into stock funds in June as they did in May, the Investment Co. Institute reported Thursday, and new inflows all but dried up in July. So much for the theory that the baby boomers’ craving for savings can only keep prices going up.
This edginess isn’t just palpable, it’s measurable. Volatility–a fancy name for the rate at which stock prices change from minute to minute or day to day–soared in July (chart). “Any way you measure, it’s substantially higher than it has been in the last five years,” says Aamir Sheikh of BARRA, which advises big investors on risk management. But that misses an essential point: viewed over two decades, Sheikh adds, today’s volatility is only slightly above average. In short, investors have gotten spoiled. The great bull market that began back in August 1992 has been a time of unusual calm. July was less a descent into turmoil than a return to normalcy.
The bears assert that high volatility signals a sick market. Don’t bet your savings on it. “It’s probably just as likely that volatility will decline,” says David Blitzer, chief economist of Standard & Poor’s. And even if turbulence persists, that’s anything but a clear signal. Volatility has called five of the last three market downturns. lt often rises before stocks drop, but it rises just as often when stocks aren’t trending anywhere at all. So flee the Stock market at your own risk. You could miss a turnaround.
Short of outright flight, you can reduce your risks. If you’re deep of pocket, you might hedge your bets by buying options on stock-market indexes. If you do it right, your option will rise in value should your stocks take a tumble. Trouble is, the pros have been there first; some longterm options on the S&P 500 have doubled in price since June. For most folks, says strategist Stuart Freeman of A.G. Edwards & Co., the better choice may be to move modestly away from high fliers and into cash and stodgy stocks that pay high dividends, such as utilities and property insurers. You’re guaranteed not to make a killing. But if corporate profits tank or interest rates rise. it’s also a good bet that you won’t lose much sleep.
The stock markets bounced around like crazy in July. But previous periods of fluctuation have shown that volatile markets aren’t necessarily a sell signal.
The S&P moved more than 2 percentage points on five separate days. Stock prices ended the turbulent month about where they started it. A rally began in June.
Rising volatility preceded a crash, with the S&P dropping almost a third over two weeks. Stocks were choppier than normal for months afterward. it took 20 months for the index to regain its pre-crash level:
Jumpy markets didn’t foretell a strong summer.
Markets grew volatile around the holidays–as prices were going up.
