Fears of an unfamiliar villain - deflation - helped set off Wall Street’s latest spasms, the chief investment officer for the Frank Russell Co. said Tuesday.
Randy Lert said investors fear Asian countries will try to export their way out of their current economic woes. If they are correct, he said, the exporters will cut prices to win a share of the U.S. market.
Other producers will have to respond, putting pressure on everyone’s profits, Lert said.
He said high-technology has been particularly hard hit in the market because those companies enjoy some of the widest profit margins.
And many of those products or their components are made in Asia, he said.
Lert said the flip side of the sudden focus on deflation is the possibility ongoing concerns about inflation will subside, and with them the threat of increased interest rates.
Inflation raises prices and reduces the value of the dollar. Deflation cuts prices, raising the dollar’s value.
Federal Reserve Bank Chairman Alan Greenspan, whose past comments on the market and interest rates have set off wild, if temporary, market moves, is scheduled to appear before Congress today.
“The market is speaking to the Fed,” Lert said, warning that too heavy a hand could push the economy into a deflationary environment.
“The current scenario is going to be very hard to read,” he said.
Lert said the other question mark for Wall Street is the staying power of the individual investor, who now controls more assets than professional money managers.
“We don’t have much history with that kind of situation,” he said, noting that activity in mutual funds managed by Tacoma-based Russell has been minor.
Spokane brokers and advisers reported another relatively quiet day despite the immense volume of trading in New York.
“I haven’t really had anybody selling anything,” said Marilyn Rider, a broker at Prudential Securities.
She said she told clients who called Monday to avoid rash decisions. Most heeded the advice, she said.
“A day like yesterday (Monday) is certainly not the time to sell,” Rider said, adding “I don’t have any traders.”
Rider said she was also repeating a reminder she gives every year at this time no matter what the stock markets are doing: don’t buy into mutual funds.
That’s because in another month, most will be making their distributions for the year, and investors will owe tax on those sums whether they’ve been in the fund for a year or a day.
If an investor wants to get into a fund now, Rider said, new funds that will not be making a distribution this year are the best choice.
Stuart Grossman, of WMA Securities, said the market’s behavior was a classic turn of the “Wall Street Waltz,” a pattern of three rallies and one pullback that produces an advance over time.
Clients find the “‘waltz” reassuring when the market swings downward, he said.
Financial planner Janice Penar said the market’s gyrations were a non-event for her clients.
Her job, she said, is to sort out their financial goals, identify the tools that will meet them, then review the results periodically to make sure the portfolio is on track.
If events like those of Monday suddenly cause alarm, Penar said, stockbrokers are probably better able to provide reassuring handholding.
“Ours is pretty much a longer term type portfolio,” she said. “You focus on the end result.”
Penar said her job has been somewhat tougher the last few years because selling clients on balanced investments that include bonds or other instruments becomes more difficult when stocks perform so spectacularly.
Even if the Dow Jones industrial average were to finish 1997 with no gain, she noted, the average return over the last two years would still be about 15 percent.
The historic average is only around 10 percent, she said.
“We expect to see these cycles,” said Bill Fautch, local spokesman for the National Association of Investors Corp.
The NAIC is a non-profit organization that provides investment education and materials to individuals and clubs around the country.
Fautch belongs to one of several investment clubs in the Spokane area.
He said the 14 stocks in the club’s portfolio have produced an annual return of about 26 percent.
“At least we were until the other day,” Fautch said dryly.
He said members remain confident in U.S. markets. Foreign markets, like butterflies, will continue their volatile ways, he said.
“It’s been a great market,” Fautch said. “If you’re in it for the long haul, you ride out these peaks and valleys.”
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