The Markets: What's Going Down

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Damn! The economy is strong. Production, sales, incomes are up. More people are finding jobs. Damn! Nobody on Wall Street would use those exact words; they sound too hardhearted. But the essential thought is voiced by many analysts trying to explain last week's sudden bust in the stock and bond markets (which is no easy job). In extenso, their reasoning goes like this: a strong economy threatens a revival of inflation, at least in the minds of the governors of the Federal Reserve Board. It also means higher interest rates: automatically, because of rising loan demand from business and consumers, but even more because the Federal Reserve is actively pushing up rates to ward off the not-yet-visible inflation. Rising interest rates by definition mean lower bond prices. And falling bond prices pull down stock prices too. "The economy is doing well, and the market is doing terribly," sums up Byron Wein, chief U.S. market strategist for the investment firm Morgan Stanley.

Even on Wall Street, that sounds like twisted logic to some. "The rational reasons for the sell-off ((inflation worries and interest rates)) in my mind just barely border on the rational," says Stephen Quickel, editor of U.S. Investment Report, a biweekly newsletter. Michael Metz, chief investment strategist for Oppenheimer & Co., concurs: "Financial markets have a world of their own and motivations of their own."

If such experts as these are puzzled, what are new investors to make of the tailspin? That question worries market professionals more than almost anything else. Since the 1987 crash gave way to a new boom, millions of investors have put a few thousand dollars each into the market, mostly by way of mutual funds. The great majority are getting their first bitter taste of a down market. If they panic and sell out, they could turn a downward spiral into a genuine crash.

So far, the so-called little guys have kept their cool. Rationally enough, most have stopped putting new money into stock or bond purchases, but few are rushing to sell. "I've done nothing," says Don Halbert, 41, a project leader and biologist with Abbott Labs in suburban Chicago. "I had a couple of stocks that were doing so well that at the beginning of last week I decided it was time to sell them. But then the market started to die, so I'm hanging on to everything," at least until prices recover a bit. After 2 1/2 years in the market, Aimee Swenby, 31, an executive assistant at a financial planning firm, and her husband John, 37, have sold, on the advice of a planner who told them to cash in some of their gains, 25% of the $20,000 worth of mutual-fund shares they had accumulated. They intend to hold the rest. Says Aimee: "I have & confidence the market will come back."