Investors in U.S. stocks were taken on a wild roller-coaster ride in the first quarter, but there were a lot more sickening plunges than...
Investors in U.S. stocks were taken on a wild roller-coaster ride in the first quarter, but there were a lot more sickening plunges than exhilarating ascents.
The benchmark Standard & Poor’s 500 gained 7.48 points Monday to finish the quarter at 1,322.70. But the index sank nearly 10 percent in the quarter, its biggest drop since the third quarter of 2002. The decline followed a 3.8 percent decline in the fourth quarter of 2007; all told, the S&P has fallen 15.5 percent since peaking on Oct. 9.
The story was much the same for other market measures. The Dow Jones Industrials rose 46.49 Monday to close at 12,262.89, for a quarterly decline of 7.6 percent. The technology-laden Nasdaq composite, despite adding 17.92 to close at 2,279.10, still lost 14.1 percent in the quarter — a sign of how poorly many tech stocks performed.
Northwest stocks fared a bit better: The Seattle Times’ index of companies headquartered in Washington, Oregon or Idaho lost “just” 7.1 percent in the first quarter, and is down 12.5 percent from its October high. (The Times index rose 15.36 points on Monday, ending the quarter at 1,611.16.)
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But it was the markets’ extraordinary volatility that stood out for many observers. It wasn’t unusual, for example, for the Dow to be up by 100-plus points at lunchtime, only to finish the trading day down by even more.
“We’ve had a manic-depressive market,” said Fred Dickson, chief market strategist for D.A. Davidson in suburban Portland. “We seem to go from mania to depression and back to mania in the space of a couple of hours.”
On 31 of the 60 trading days in the first quarter — 52 percent of the time, in other words — the S&P rose or fell by more than 1 percent; in the fourth quarter of 2007, by contrast, it did so on just 24 out of 64 trading days (38 percent).
That sort of turbulence, analysts said, is created by traders’ fear and uncertainty: Which area of the credit market will implode next? Will the recession be short or prolonged, mild or deep? Will debt-strapped consumers finally stop spending on everything except food and gas?
“There’s enormous uncertainty, and it’s based in fear over what’s happening in the credit markets,” said George Feiger, head of Contango Capital Advisors, a unit of Zions Bancorporation with $1.3 billion under management.
The credit crunch began last summer, when homeowners with subprime mortgages began defaulting in large numbers. Hedge funds and other holders of complex securities tied to subprimes began dumping them, causing their market values to plunge.
The falling market prices ate away at the balance sheets of other investors, who started selling off assets to raise cash. Investor appetite for newfangled debt instruments, such as auction-rate securities, quickly evaporated.
“What you’ve got is this massive unwinding of the credit bubble, and that’s not just simple debt,” Feiger said. “The whole system is stuffed with bad credit, uncertainty about who owns how much of it, and sales triggering other sales.”
Not surprisingly, financial-services companies bore much of the brunt of the quarter’s declines. Among S&P’s major industrial sectors, commercial banks were down 10.1 percent, consumer finance 11 percent, investment banks 21 percent, and thrifts and mortgage lenders 22.9 percent.
But the market declines were broad as well as deep, cutting across industries and spanning all sizes of companies. Of the 152 Northwest-based companies tracked in the Times index, just 31 finished the quarter ahead of where they started.
Larry Adam, chief investment strategist for Deutsche Bank Private Wealth Management, said he was surprised by the information-technology sector’s poor performance in the quarter. Info tech was, in fact, the worst performer of S&P’s 10 broad market sectors, falling 15.4 percent; Microsoft dropped 20.3 percent.
Adam had overweighted tech stocks, he said, because the sector has been posting good profits, has relatively little exposure to the credit mess and does much of its business overseas. The decline this quarter may relate to concerns that a U.S. recession will cut into tech spending, he said, or may be simply a reaction to the sector’s strong gains in 2007.
Telecom stocks, especially wireless providers such as Sprint, have been hurt by heavy price competition and reliance on domestic markets, Adam said.
And traders have bid down health-care stocks — a not-uncommon occurrence in the run-up to presidential elections, which usually produce calls to overhaul the industry.
The weak stock markets sapped support for initial public offerings. Despite a few high-profile deals, such as Visa’s $17.9 billion offering, only 27 IPOs were completed in the quarter, compared with 66 in the same period last year.
The number of companies filing for IPOs fell to 63 from 77 in the first quarter of 2007, and most of them were either foreign or “blank-check” companies, whose sole purpose in raising money is to buy some other operating business.
Two local companies, Seattle biotech Omeros and Bellevue telecom Intelius, filed to go public in January but haven’t made much visible progress toward that goal. Three area companies that had declared IPO plans in the past two years — Tully’s Coffee, Imperium Renewables and Light Sciences Oncology — formally withdrew them in the quarter.
Drew DeSilver: 206-464-3145 or email@example.com