The only sure thing after the stock market opens Mondayis that investors will see plenty of volatility.
But it's possible to pick up a few clues about likelyopening activity by taking a look at overseas trading and action in the U.S.bond markets, says Michael Ryngaert, a financeprofessor at the University of Florida. The upshot?It's not encouraging. And aside from the problem ofbleak short-term market sentiment, weak fundamentalscould discourage bargain-hunting even in a beaten-downstock market.
We talked to Ryngaert about what to expecttoday and which sectors are likely to suffer most.The damage to consumer confidence this week couldpuncture the prospects for a gamut of stocks, he says -- not just airline and travel-related issues, buta 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 businessagain. Why?
If you look at what happenedinternationally, you tended to see
similar declines.Usually what you get is a little bounce-back whenyou've had dramatic drops, but
Friday we've seen acontinuation of the selloffs. If you're basing it onwhat happened in other markets, 3% to 4%might be conservative.
Overseas at least, France was down 5%
Friday. Ifyou 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 likefutures, because the futures markets are not open. But government bond markets opened Thursday. Interest rates on the short end of the Treasuryspectrum have certainly declined as investors seeksafe havens, driving up prices and driving downyields. If you look now, the three-month yield is2.64%. It was over 3% when this started. The yield onthe two-year Treasury is now at a 40 to50-year low.
The fact that rates are taking a big dip on theshort end is not necessarily going to affect the longend as much. We've seen modest pullbacks since thisstarted. The 10-year's come down about 25 basispoints. The 30-year bond hasn't changed all thatmuch.
TSC: Is there a historical analogy you can thinkof that might give us a clue to how the market wouldreact?
I think the closest thing we could lookto would probably be the
period leading up to andincluding the Gulf War. It was similar in the sensethat there was lot of uncertainty, the potential forarmed conflict, for disruption of oil. You've gotfears over travel and terrorism that were certainlypresent back then, too.
Another similarity is that if you go back to thattime, the economy was already slowing down, partlybecause of higher energy prices too. You had adecelerating economy, then sharp policy shocks.
But the stock market did extraordinarily well
following U.S. actions in the Gulf War. If you lookat 1990, you had a 15% selloff in August-September.Then what we proceeded to see in November 1990 throughMarch 1991 was an 18% to 20% recovery.
TSC: Coming back to the present, which sectors doyou think are most likely to sell off when the marketopens?
I think airlines are going to have apretty good fall. There's just no way to put a goodface on what's happened to them. People have not evenbeen flying for a few days. It's hard to believe airtraffic is going to be what it was before, andairlines were already struggling because of theslowdown in the economy and business travel.
I'd expect insurance is going to get hit,especially anyone with coverage in the Manhattan realestate market that got hit in the attacks. I'd expectthe hotel sector would probably not fare well,especially the high-end sector located in more urbanareas and companies with New York exposure.
I'd guess that oil companies, especially thosethat drill, would probably get a minor benefit out ofthis. It's still not totally clear that this wouldspill over into a big problem with respect to Mideastoutput of oil. But if it does, any company withreserves outside the Middle East might well benefit. Oiltraditionally tends to be a little more of a safehaven as well. You would think this would benefit oilservices,
TSC: Any other stocks that might get hurt when themarket opens?
Retailers, I think. For one thing, therewas a very large decline in the Michigan ConsumerConfidence number that came out, which reflects theperiod even before the terrorist attack. The sentimentnumber came in at 83.6, and it was expected to be 92.Also, weekly initial unemployment claims came in about26,000 higher than expected. So you've got those lowreadings on the economy.
Then what typically happens in this sort ofsituation is that a lot of people tend to sit aroundand watch television.; they want to watch the news. I'll betthere aren't that many people at the mall. And ofcourse Tuesday everything was closed down, period. Ithink when stores come out with September salesfigures, they'll be pretty terrible across the board.
A good parallel is to look at the Gulf War, whenthere 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 anextent. I think people are now seeing theinternational markets fall, and they're probably goingto see domestic markets fall on Monday. They've justseen the country attacked, and we're hearing newsreporters talk about the fact that this could tip usinto recession. You put it all together and it doesn'tadd up to a real positive retail environment.
TSC: What about companies that stand to benefitfrom the rebuilding effort? Does it make sense toinvest in those?
Sure, there'll be sectors of the economy thatwill benefit from that -- those that provideconstruction materials, contracting firms, people whomake the cement and steel could benefit. But that'sgoing to be a little ways off. I would tend to thinkthe negatives outweigh the positives.
TSC: Is there any kind of scenario in which thingscould turn out better than they seem right now?
There's the notion that sometimes the time to buyis when everything just looks awful, and maybe after
the market opens things will get to the point wherethey can't get much worse.
The problem I think for the stock market, whichwas true even before this happened, is that byconventional standards, stocks still are not cheap. Ifyou look at earnings forecasts for 2002, even forfirms with fiscal years that might have extended into2003, 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 stillcan't sit back and say, things have sold off 70%, sotherefore they're cheap. The starting point was sohigh that they're still really not cheap.
Ultimately, it still comes down to what kinds ofprofits companies can make. To the extent you believethe economic slowdown is now going on quite a bitlonger than you originally thought, that's a negative.And to the extent that there're still stocks out therethat trade at historically high fundamentals, that's anegative.