The Daily Interview: What to Expect as the Market Reopens

The only sure thing after the stock market opens Monday is that investors will see plenty of volatility.

But it's possible to pick up a few clues about likely opening activity by taking a look at overseas trading and action in the U.S. bond markets, says Michael Ryngaert, a finance professor at the University of Florida. The upshot? It's not encouraging. And aside from the problem of bleak short-term market sentiment, weak fundamentals could discourage bargain-hunting even in a beaten-down stock market.

We talked to Ryngaert about what to expect today and which sectors are likely to suffer most. The damage to consumer confidence this week could puncture the prospects for a gamut of stocks, he says -- not just airline and travel-related issues, but a broad range of retail equities.

TSC: You've suggested we could see a 3% to 4% percent drop in the market when it opens for business again. Why?

Ryngaert: If you look at what happened internationally, you tended to see [similar declines]. Usually what you get is a little bounce-back when you've had dramatic drops, but [Friday] we've seen a continuation of the selloffs. If you're basing it on what happened in other markets, 3% to 4% might be conservative.

Overseas at least, France was down 5% [Friday]. If you were looking at a market that acts more like ours, it would probably be the U.K. London was down over 6% relative to where it was before the incident.

There's nothing to guide us based on things like futures, because the futures markets are not open. But government bond markets opened Thursday. Interest rates on the short end of the Treasury spectrum have certainly declined as investors seek safe havens, driving up prices and driving down yields. If you look now, the three-month yield is 2.64%. It was over 3% when this started. The yield on the two-year Treasury is now at a 40 to 50-year low.

The fact that rates are taking a big dip on the short end is not necessarily going to affect the long end as much. We've seen modest pullbacks since this started. The 10-year's come down about 25 basis points. The 30-year bond hasn't changed all that much.

TSC: Is there a historical analogy you can think of that might give us a clue to how the market would react?

Ryngaert: I think the closest thing we could look to would probably be the [period leading up to and including] the Gulf War. It was similar in the sense that there was lot of uncertainty, the potential for armed conflict, for disruption of oil. You've got fears over travel and terrorism that were certainly present back then, too.

Another similarity is that if you go back to that time, the economy was already slowing down, partly because of higher energy prices too. You had a decelerating economy, then sharp policy shocks.

But the stock market did extraordinarily well [following U.S. actions in the Gulf War]. If you look at 1990, you had a 15% selloff in August-September. Then what we proceeded to see in November 1990 through March 1991 was an 18% to 20% recovery.

TSC: Coming back to the present, which sectors do you think are most likely to sell off when the market opens?

Ryngaert: I think airlines are going to have a pretty good fall. There's just no way to put a good face on what's happened to them. People have not even been flying for a few days. It's hard to believe air traffic is going to be what it was before, and airlines were already struggling because of the slowdown in the economy and business travel.

I'd expect insurance is going to get hit, especially anyone with coverage in the Manhattan real estate market that got hit in the attacks. I'd expect the hotel sector would probably not fare well, especially the high-end sector located in more urban areas and companies with New York exposure.

I'd guess that oil companies, especially those that drill, would probably get a minor benefit out of this. It's still not totally clear that this would spill over into a big problem with respect to Mideast output of oil. But if it does, any company with reserves outside the Middle East might well benefit. Oil traditionally tends to be a little more of a safe haven as well. You would think this would benefit oil services, [too].

TSC: Any other stocks that might get hurt when the market opens?

Ryngaert: Retailers, I think. For one thing, there was a very large decline in the Michigan Consumer Confidence number that came out, which reflects the period even before the terrorist attack. The sentiment number came in at 83.6, and it was expected to be 92. Also, weekly initial unemployment claims came in about 26,000 higher than expected. So you've got those low readings on the economy.

Then what typically happens in this sort of situation is that a lot of people tend to sit around and watch television.; they want to watch the news. I'll bet there aren't that many people at the mall. And of course Tuesday everything was closed down, period. I think when stores come out with September sales figures, they'll be pretty terrible across the board.

A good parallel is to look at the Gulf War, when there was a pretty good slowdown in retail sales. Everybody wanted to go home; people weren't shopping.

Some of this stuff is self-fulfilling to an extent. I think people are now seeing the international markets fall, and they're probably going to see domestic markets fall on Monday. They've just seen the country attacked, and we're hearing news reporters talk about the fact that this could tip us into recession. You put it all together and it doesn't add up to a real positive retail environment.

TSC: What about companies that stand to benefit from the rebuilding effort? Does it make sense to invest in those?

Ryngaert: Sure, there'll be sectors of the economy that will benefit from that -- those that provide construction materials, contracting firms, people who make the cement and steel could benefit. But that's going to be a little ways off. I would tend to think the negatives outweigh the positives.

TSC: Is there any kind of scenario in which things could turn out better than they seem right now?

Ryngaert: There's the notion that sometimes the time to buy is when everything just looks awful, and maybe after [the market opens] things will get to the point where they can't get much worse.

The problem I think for the stock market, which was true even before this happened, is that by conventional standards, stocks still are not cheap. If you look at earnings forecasts for 2002, even for firms with fiscal years that might have extended into 2003, the earnings multiples are still pretty high. Measured by price-to-sales, price to book values, they're pretty high too. So in some sense, you still can't sit back and say, things have sold off 70%, so therefore they're cheap. The starting point was so high that they're still really not cheap.

Ultimately, it still comes down to what kinds of profits companies can make. To the extent you believe the economic slowdown is now going on quite a bit longer than you originally thought, that's a negative. And to the extent that there're still stocks out there that trade at historically high fundamentals, that's a negative.