Don't be overly impressed by the resilience of the blue-chip stock averages in the past few months, cautions economist Douglas Ramsey of SCI Capital Management Inc. in Cedar Rapids, Iowa. "The average stock," he says, "has undergone a brutal correction this year."
From their July, 1993, to February, 1994, peaks through July 31 of this year, the best-known stock indexes have registered declines from about 5% to 10%. But these numbers are deceptive, notes Ramsey. He calculates half the stocks on the American Stock Exchange and in the NASDAQ market posted declines of at least 22% and 27%, respectively. Indeed, a quarter of all NASDAQ-traded stocks were down 50% or more.
In periods of rising interest rates and tighter liquidity, explains Ramsey, "investors retreat to the highly liquid large-cap stocks." Right now, he thinks the market may be regaining some breadth in hopes that slowing economic growth precludes more rate hikes. "But if the Fed tightens further, the stocks of many smaller companies could be clobbered again."