Thirteen Days That Shook The Market

Hot economy, slim profits--no wonder investors were spooked

Ever wonder why Wall Street traders gulp Maalox? July's stunning volatility in the stock market provides a pretty good answer. An unnerving mix of stronger-than-expected economic reports and weaker-thanforecast earnings left even seasoned pros grasping for footing. In the end, bulls and bears staked out their conflicting positions, sending the markets up and down in wild gyrations.

The fireworks began on July 5 when the Labor Dept. released a surprisingly strong jobs report. The unemployment rate, at 5.3%, was the lowest in six years. The report also showed a sharp increase in hourly wages, fueling fears of an overheating economy. "The buzz was to keep an eye on the Federal Reserve, that maybe they would [raise rates] before their formal August 20 meeting," says Arthur R. Hogan, head of equity trading at Dean Witter Reynolds Inc.

The market responded as if inflation was set to explode. The 30-year Treasury bond tumbled, and its yield rose from 6.93% to 7.19%. "That fanned fears of a quick, aggressive rise in rates by the Fed," says Abby Joseph Cohen, investment strategist at Goldman, Sachs & Co. Investors dumped stocks, pushing the market down 115 points. The fall was worsened by the lack of liquidity after the July 4 holiday.

Over the next week, investor sentiment underwent a seismic shift. Suddenly, the economy seemed to show signs of softening. The change in mind-set was sparked by warnings from some high-profile companies that they would not meet earnings expectations. Late on July 9, Motorola Inc. reported weak earnings, casting doubt on prospects for tech shares. Its stock, which had fallen in after-hours trading on July 9, closed July 10 at 57 7/8, off 8 5/8. The same day, after the market closed, Hewlett-Packard Co. warned its earnings might disappoint. "Fears in the equity market flipped from `growth is too fast' to `perhaps growth isn't fast enough to support earnings,"' says Cohen.

"THE CRAZIEST DAY." Earnings fears mounted on July 11, leading to another sharp market fall. At 10:09 a.m., Chicago time, Standard & Poor's 500-stock index futures hit the Chicago Mercantile Exchange's 12-point limit, which temporarily halted trading. Three hours later, the index futures hit the 20-point limit, which had only been triggered twice since its debut in 1990: on Mar. 8, when the Dow closed down 102 points, and on Apr. 8, when it fell 171 points. The July 11 plunge wasn't all that deep--83 points.

Friday, July 12, brought some good news. Subdued producer price index numbers and weak retail sales relieved inflation jitters somewhat. The Dow lost just 10 points. But the weekend gave investors time to worry, and stocks dove on Monday, July 15. The Dow broke through its 200-day moving average of 5360, which sent an important signal to market technicians, says Scott H. Fullman, chief options strategist at Swiss American Securities Inc. It closed the day down 161 points, almost 3%; the NASDAQ composite index fell almost 4%.

A feeble rally petered out the next morning, and the market seemed to go into a free fall. Intel Corp. was set to report after the close; investors were nervous. By early afternoon, the Dow was down 167.2 points. Again the S&P 500 futures hit the 12-point trigger and then the 20-point trigger, halting trading.

There was some good news that day, however. Commodity prices fell, the feds announced a sharp reduction in the deficit, and some strong earnings reports trickled in. Buying picked up, and the market reversed itself, moving to a 53-point gain before closing at 5358.76, for a 9.25-point gain. "It was probably the craziest day in terms of swings that I've ever seen," says Hogan, because traders couldn't pin the gyrations on any specific announcement or statistic.

The big sellers were money managers. "It was a lot of professional traders and program trading activity," says Hogan. Timothy Heekin, managing director of equity block trading at Salomon Brothers Inc., adds that earnings-momentum selling, moves by asset allocators out of stocks and into bonds, the hedging of options strategies, and mutual-fund redemptions all contributed to the market's swings.

The ride slowed on July 17. Intel had reported strong earnings. Long-bond yields had sunk to 7.02%. The Dow traded within a narrower range and ended the day up 18 points. The NASDAQ index was up a healthy 3.15%. Meanwhile, traders are awaiting signs from the Fed, more earnings reports, and preelection polls. Hold tight, and pass the Maalox.

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