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September Ushers In a Season of Investor Worry

September 02, 1997|TOM PETRUNO

April may have been T.S. Eliot's idea of the cruelest month, but for Wall Street no month has been more consistently cruel than September.

And this September, there is far more than just the turn of the calendar page worrying many investors.

With Southeast Asian stock markets and currencies in meltdown mode, U.S. blue-chip stocks bouncing wildly in recent weeks, and selling having accelerated in August in previously high-flying world stock markets, investors have good reason to fear that September will bring trouble.

The issue is not so much the sudden volatility in stock markets, but the question of what is causing that volatility. Is it just a matter of long-overdue profit-taking--or a warning that the favorable fundamentals that have fueled stocks' advance worldwide in the 1990s are rapidly dissipating?

In Southeast Asia, of course, there is little doubt that the fundamentals have dramatically changed for the worse, at least in the near term. The plunge in currency values throughout the region has sent interest rates soaring and dimmed prospects for corporate earnings and economic growth for this year, and possibly even for the first half of 1998.

Investors continue to flee Southeast Asian stocks, even though many of those markets have already plunged between 20% and 43% from their 1997 peaks in local currency terms. (They're off even more in dollar terms, given currency devaluations.)

The collapse of share prices in Southeast Asia is a chilling reminder of what can happen when investor psychology turns from greed to fear.

But is there any reason to believe that the U.S. bull market is in similar danger after its tremendous run of nearly seven years?

Many analysts say no. The 7.7% drop in the Dow Jones industrials, to 7,622.42 by Friday from the Aug. 6 peak of 8,259.31, is "just a consolidation, 1997-style," argues Eugene Peroni, veteran technical analyst at brokerage Janney Montgomery Scott in Philadelphia.

Like the Dow's spring decline, which shaved nearly 10% from the index, this one has been "abrupt and sharp," Peroni notes, and the volatility accompanying it has understandably scared some investors. But that's healthy in a bull market, he says.

"I think the volatility is starting to weed out some of the weak hands" from the market, Peroni says. In other words, stock is being sold to "stronger hands," meaning investors who are more likely to stay put, he says.

Like other market technicians, Peroni has been heartened by gains in smaller stocks, even as blue-chip shares have slumped. The Russell 2,000 index of smaller stocks hit a record high Friday, rising 0.4% to 423.43, even as the Dow fell 1%.

What's more, Peroni believes U.S. investor psychology still is largely positive toward stocks, which he expects will limit any market "correction."


Other analysts, however, are much more worried about the possible message in the Dow's slide, given the background noise: the market carnage in Southeast Asia, growing concern about an increase in German interest rates this fall, and the recent profit warnings from such market leaders as Coca-Cola and Gillette.

David Shulman, investment strategist at brokerage Salomon Bros. in New York, concedes that it isn't clear whether the fundamentals supporting the U.S. bull market are indeed falling away.

But if that's the case, he says, it should become far more apparent in coming weeks. For now, he says, the stock market remains a battleground for two camps: those who believe in the "new paradigm" U.S. economy, wherein economic growth remains steady while inflation and interest rates remain low, and those who fear that we are in the midst of "some variant of the normal cyclical economy," which will soon give way to either overheating and higher inflation or a distinct cooling and a sharp decline in corporate earnings.

Either way, if the economy is about to take a sharp cyclical turn, Shulman argues that "stocks are extraordinarily overvalued."

For investors who are in that camp, the calendar can't offer much solace. Since 1950, September has hands-down been the month least kind to the bulls.

Between 1950 and 1990, the Dow industrials fell in 27 Septembers and rose in 14, a bearish tilt unrivaled by any other month, according to the Stock Trader's Almanac.

Since 1990, however, September has been less trying for stocks, with the Dow rising in three Septembers and falling in three.

And this time around? As investors mull whether and what to buy and sell this fall, here are the issues that should frame the debate and the choices:

* Southeast Asian woes: More detriment than benefit, or vice versa? There is no doubt in the minds of most economists that what has happened thus far in Southeast Asia is a negative for world economic growth in the near term. The one region of the world where decent growth was considered a "sure thing" now has question marks all over it.

Naturally, that could mean weaker sales and earnings for many U.S. firms that export to the region.

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