Investors Act On Instincts, Ignore Economic Basics Sudden Shift In Financial Markets Confounds Analysts, Defies Trends

To analysts of business and the U.S. economy, the storm of selling that hit the stock market Tuesday and Wednesday came out of a seemingly clear sky.

As stock prices have climbed to record highs after record high in recent weeks, the economic news has been largely placid and upbeat.

Indeed, Alan Greenspan, chairman of the Federal Reserve Board, testified in Congress Wednesday morning that “the economic outlook, on balance, is encouraging, despite the inevitable risks.”

But on Wall Street, where stock prices began to slip on Tuesday, the mood was suddenly jumpy. The Dow Jones average of 30 industrial stocks, down 50.01 points on Tuesday, tumbled as much as 133.84 points just before 2 p.m. EDT Wednesday, before rebounding to finish the day with a 57.41 point loss at 4,628.87.

Interest rates rose in the bond market. But stock traders didn’t appear to be worried about any new upsurge in interest rates or other problems that might face the producing and consuming economy.

Rather, investors seemed to have become uneasy about the recent performance of the stock market itself, which had carried the broad indexes to gains of 20 percent to 30 percent since the beginning of the year.

From last Nov. 23 through Monday of this week, when it stood at 4,736, the Dow Jones industrial average climbed 1,062 points. The further that advance progressed, the more the debate intensified over whether and when the market might be due for a setback.

Many traders grew especially edgy over a runaway rise in technology stocks, which have been riding the boom in personal computing, electronic communications and the automation of business information.

As legitimate as that economic story may be, technology stocks are notoriously fickle investments. When two standout companies in the field, Intel and Microsoft, made news announcements this week that struck Wall Street as at least mildly disappointing, stock prices began to fall.

“It was largely technology issues, and then eventually they took the rest of the market down with them,” said William LeFevre, an analyst at Ehrenkrantz King Nussbaum Inc. in New York.

Wednesday’s gyrations fanned the debate over whether the market’s rapid rise over the past few months was warranted or the result of speculative frenzy.

Despite the market’s sharp drop on Tuesday and Wednesday, some analysts remain optimistic.

“At current prices, equity valuations are not unreasonable,” asserted John Shaughnessy at Advest Inc. in Hartford, Conn. “While we acknowledge that the market is susceptible to a correction of perhaps 3 percent to 5 percent, our outlook remains positive.”