Commentary: How Real-Time War Is Driving the Market
At 12:20 p.m. on Mar. 25, the Dow Jones industrial average began a 35-point rally. Britain's Sky News (BSY ) had just reported that locals were staging an anti-Saddam uprising in the southern city of Basra. Within two hours the rumors, though denied by Iraqi officials, had been broadcast by CNN, Reuters (RTRSY ), and the Associated Press. Traders scrambled to buy up stocks and sell out of bonds. "We started buying exchange-traded index funds and semiconductor HOLDRS [baskets of stocks]," says Keith Keenan, vice-president of institutional trading at Wall Street Access, which trades on behalf of hedge funds and other institutions.
Fledgling traders on Wall Street were always advised: "Don't fight the tape." But with war news dominating the market, today's rule might well be: "Don't fight the TV." Traders are glued to their sets. Often, what they see throws them into a frenzy, as they dump stocks on any hint of bad news and buy on good -- and do the opposite with Treasury bonds, gold, and oil shares. "This is a media-driven market based on the war right now," says James Park, a senior vice-president of equity trading at Brean Murray & Co. "[It's] like a sandstorm. I've seen it trade up or down 50 to 75 points within two minutes of a rumor, and once the rumor is confirmed or denied, boom, it turns right back around."
Consider the past 10 trading days. On Mar. 12, when TV reports indicated war was near and investors believed it would be short and smooth, the Dow started its rally. By Mar. 21, with euphoria filling the stock screens, the Dow soared 1,000 points, or 13%, and staged its biggest five-day gain since 1982. But after a weekend filled with news of GIs being killed or taken prisoner, and stiffer Iraqi resistance than expected, traders came back on Monday, Mar. 24, and hammered the Dow down 3.6%, its biggest drop in six months.
Clearly, this is a trader's market in which short-term plays are often the only game in town. Indeed, with volatility high and volume low, long-term strategies may be downright suicidal. That is, unless investors use these rocky times to buy or sell at certain price points. "You want to be in a position to react on a long-term fundamental basis when a short-term event offers an opportunity," says Andy Brooks, head equities trader at T. Rowe Price Group Inc. in Baltimore.
Experts say program traders, who handle a portfolio of stocks simultaneously with computerized buy-and-sell directives, account for almost a third of New York Stock Exchange trading, more than triple 1989 levels. They're playing the war along with hedge funds and proprietary traders. Retail and long-term investors remain largely on the sidelines. U.S. equity funds have lost $13 billion in net redemptions since the beginning of the year, while bond funds have attracted $38 billion, according to Banc of America Securities (BAC ).
That trend is likely to last at least as long as the war because the news, not fundamentals, is driving the market. "On days when the allied forces dominate the Iraqis, the 10-year Treasury yield and the stock market will move higher, and vice-versa. It's as simple as that," says Louis Navellier, editor of the Blue Chip Growth Letter.
That doesn't mean the general direction of the market won't be up -- at least during the war. The relief rally seen since Mar. 12 could resume with some bumps along the way. But even if it continues, it's likely unsustainable. The underpinnings of a bear market still exist. Corporate profits, for instance, remain lackluster as many companies continue to face competitive pressures and are saddled by enormous debt. And consumer confidence has been wan. True, the war could ultimately bode well for the economy. But with rising military costs, unclear prospects for fiscal stimulus, overcapacity remaining in the technology sector, and other sore points, any recovery could be pushed well into 2004.
Meanwhile, the market will continue to be tossed around by its own CNN effect. "We tend to 'watch and see' -- as opposed to 'wait and see,"' says Brean Murray's Park. And average investors? Instead of trading the news, they're probably better off just watching it.
By Marcia Vickers
With reporting from Heather Timmons