A market in search of a security blanket

NEW YORK -- If you think of the stock market as a very, very big baby, it might be easier to understand some of the volatility over the past two months.

This is a baby in need of a security blanket, and every time it can grab hold of one, it's happy. Then someone snatches it away, and the baby starts squalling.

Unfortunately, this baby isn't about to outgrow its blanket dependence anytime soon.

Over the past year Wall Street has been wracked by bouts of insecurity caused initially by the financial crisis in Asia, worsened by political problems in Japan and intensified by the economic and government deadlock in Russia.

President Clinton's troubles aggravate everything.

Lehman Brothers, in a Washington Weekly report earlier this month, warned that the market's discomfort with uncertainty could go on for some time.

"How it's resolved is less important than how soon it's resolved," Lehman analysts said of Clinton's troubles.

"We don't see it being resolved soon."

The same could be said for the world's financial problems, which also show no sign of being resolved. Pessimists like Edward Yardeni, chief economist with Deutsche Bank in New York, have been wondering if the global economy is moving toward a depression.

After enjoying a long bull market, stock traders tend to be an optimistic lot, especially when they've learned that when prices are low, it's a great time to buy.

So they've jumped at almost anything that looks like a justification for buying -- or, if you prefer, anything that looks like that blanket.

Wall Street's reactions to Federal Reserve Chairman Alan Greenspan over the past two weeks show the market's state of mind. On Sept. 4, Greenspan hinted that the Fed was leaning toward lowering interest rates because of the sagging world economy.

The next trading day, the Dow Jones industrial average shot up 380 points, its biggest one-day point gain.

Stocks continued to gain last week when Clinton said he asked Greenspan and Treasury Secretary Robert Rubin to meet with their counterparts from other leading nations to formulate a strategy to deal with the global problems.

But on Wednesday, when Greenspan told Congress there are no plans for an international effort to lower interest rates, overseas markets and then U.S. traders responded by falling sharply again. The baby was upset again.

Sometimes no one snatches away the blanket.

But like a baby who cries for a blanket, gets it and then immediately tosses it away, the market may not be able to hold on to the optimism it so desperately wants.

Third quarter earnings reports start arriving next month, and Wall Street will be looking for signs that the world's financial problems aren't hurting U.S. corporate profits as much as investors feared. Let's say there are many pleasant surprises, and the market rallies.

Don't expect it to last. Even well before Asia's fiscal troubles became apparent in the summer of 1997, stocks had a tendency to rise or fall based on what's going to happen in the future, not what has happened. And the mood among investors has been so down lately that there may be a feeling not of relief, but of foreboding that the really bad news will finally show up when fourth-quarter numbers come out.

Sometimes, as any tired and frustrated parent knows, there's no way to really comfort this baby. Sometimes you have to let it cry itself out. And wait for it to grow out of this phase.

Joyce M. Rosenberg reports on business trends for The Associated Press.

Copyright 1998
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