It was the kind of economic turnaround that should have pushed North American stock prices sharply higher. Last week the U.S. commerce department reported that increased exports had helped lower its merchandise trade deficit to $12 billion in March—its lowest level in three years and a decline of almost $5 billion from February. Some market analysts had predicted that the trade gap would be $15.5 billion. But instead of buying on the strength of the trade deficit drop, investors scrambled to sell off their stockholdings, pushing the New York Stock Exchange’s Dow Jones industrial index down 21 points and the Toronto Stock Exchange’s (TSE) 300 composite index nearly 14 points lower. Said Marshall Miller, director of research at Toronto brokerage firm Midland Doherty Ltd.: “With the market in its current mood, investors just aren’t listening, no matter how good the news is.” Indeed, on Friday, May 20, the New York Stock Exchange suffered one of its lightest trading days this year.
Stock markets are facing a crisis in confidence, which began on Black Monday, Oct. 19, when the bellwether Dow average plunged 508 points in one day. In Canada, evidence of the negative mood is obvious on the TSE’s trading floor, where the daily average value of trading during the first four months of
1988 was down 41 per cent from the same period a year earlier. Meanwhile, net sales of Canadian share-based mutual funds, which were booming before the crash, fell during the first quarter of 1988 to about one-tenth of what they were a year ago.
That lack of confidence is also pervasive on the New York Stock Exchange, where the daily average value is down 25 per cent in the first four months of 1988 compared to a year ago. And in the first quarter of this year U.S. mutual stock fund sales fell to $9.7 billion from $26.8 billion.
Investors are also expressing concern that computer-aided trading, inflation and higher interest rates will further undermine the markets. The resulting slowdown has reduced the ability of corporations to raise money through share issues and has also cut sharply into broker commissions. Said one Toronto broker: “I am not making any money. Last month I had $980 in take-home pay. I earn enough to pay for groceries but not tennis club bills.”
Nervous investors normally avoid the stock markets after a crash, transferring their cash into savings accounts, bonds and other safe investments. But the markets’ acute volatility since October has increased investor doubt. Larry Lunn, a partner in Connor, Clark & Lunn Investment Management Ltd., a
Vancouver investment counselling firm, said that the pessimism is so deep-seated that investors are ignoring the fact that corporate earnings are strong and many shares are selling at historically low prices relative to earnings.
A survey released this month by Sindlinger & Co. Inc., a Wallingford, Pa., consumer research firm, indicates that only between three and four per cent of households surveyed plan to buy stocks in the immediate future— down from 33 per cent last August, the lowest show of investor confidence in the 34 years that the firm has conducted such polls. Said the firm’s chairman, Albert Sindlinger: “I have never seen confidence this low. Investors think the stockmarkets are a crapshoot and no place for them to be.”
But factors other than stock market psychology are keeping investors on the sidelines. They are also caught in a crosscurrent of conflicting economic trends, which continue to make the stock markets look precarious. The Canadian economy is generally expected to slow later this year, or early in 1989, putting downward pressure on corporate earnings. At the same time, analysts say that they are increasingly concerned
that another round of income-eroding inflation may develop soon.
That could force central banks in Canada and the United States to intervene and use higher interest rates, the main weapon against inflation, to dampen economic activity. In fact, interest rates have been edging higher during the past month, making yields from safe, interest-bearing investments
such as treasury bills and term deposits look extremely attractive compared to gains available in the markets. Said Murray Grossner, head of research at Richardson Greenshields of Canada Ltd.: “The markets look nervous for
the next eight to 14 months.” Investors also appear to be concerned about the long-term effects of program trading—a process in which computers automatically advise traders to buy or sell stocks under predetermined market conditions. Regulatory officials have examined proposals to curb computer-aided trading, which has been blamed for driving the U.S. markets up and down
dramatically. But, says Robert Gordon, president of Twenty-First Securities Corp., a New York City investment firm specializing in futures and options: “Program trading may exacerbate the swings in prices but it doesn’t start them.” Investor caution has a dramatic effect on many stockbrokers’ incomes. When investors are concentrating on low-risk instruments such as bonds, treasury bills and money-market mutual funds, commission incomes for brokers shrink. And much of the remaining stock trading is now carried out on behalf of professional money managers who pay rock-bottom commission rates to the brokers they employ.
I The tough times have already driven brokers out of the securities business, and firms have started to lay off poor producers. Figures released last week by The Investment Dealers Association of Canada show that the Canadian securities industry lost 1,085 jobs, or about four per cent of the to-
tal, between October and February.
The trading decline also has implications beyond the investment industry. Corporate treasurers are finding it harder to raise new capital to expand their businesses by issuing stock. During the first four months of 1988 only 31 new stock issues were floated on the TSE compared to 190 during all of 1987. The amount of capital raised has fallen to $771 million during the first quarter of 1988 from $12.7 billion in 1987. At RBC Dominion Securities Inc. in Toronto, broker Barbara Reid has seen the bulk of her income from new issues collapse. Reid said that her business in blue-chip stocks has expanded enough to offset losses in that area. But, she added: “new issues were 44.7 per cent of my business. I am absolutely stressed out of my mind. I was making fabulous money. Then all of sudden it stopped.”
For all that, Byron Wien, an investment strategist with Morgan Stanley & Co., Inc. in New York City, predicts that the markets will be higher by year-end. He added that most people have overestimated U.S. economic strength, and that when that becomes generally recognized, fears of inflation and higher interest rates should recede.
But for now, a dramatic change in perception seems necessary to coax investors back into the markets. Richardson’s Grossner said that a string of encouraging economic reports in the United States, or another drop in stock prices—making them even more attractive to buy—might rekindle investor interest. Most likely, though, more than a year of strong economic indicators may have to be seen before shell-shocked investors regain their nerve.
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