What’s Amiss With Stocks This Year?

With this week’s turmoil in stocks, Wall Street is once again puzzling over the question that has dogged money pros all year: Why does this market seem so tough on everyone?

For the most part, the stock market got exactly the backdrop it asked for this year. Interest rates are down, the economy is slowly recovering, inflation is low and the debt problem is unwinding.

Yet when investors tally up their stock portfolios, many come to one of two equally maddening conclusions--either their stocks haven’t moved at all, or they’ve dropped dramatically. The opportunities for making money in an allegedly “perfect” market environment have been relatively few, and that was the case even before this week.

At the same time, the broad market indexes hardly mirror the deep gloom that has suddenly overtaken Wall Street. The Standard & Poor’s index of 500 major stocks has lost just 3.9% year-to-date, after soaring 26.3% in 1991. A little give-back after a huge gain wouldn’t normally be viewed as apocalyptic.

So why do investors fear the market so? Jerry Appel, a market veteran at the firm of Systems & Forecasts Inc. in Great Neck, N.Y., says investors are leery of more than a new slowdown in the economy. There’s a feeling that something has just plain been amiss with stocks this year--that the market isn’t working.

For one thing, he notes, the market has traded in an extraordinarily narrow range for much of 1992, affording traders and investors few opportunities to make a reasonably quick buck.

Though many stock buyers profess to be long-term investors, it’s human nature that you’ll feel good about your long-term investment only if it already looks like a profitable short-term investment, Appel notes.

Yet in 21 of the last 24 weeks, he says, the S&P; 500 index has traded in a range of just 2.7% from its weekly high to its weekly low. “This has been about the tightest six months for trading that I can recall,” says Appel, 59.

“For the most part, people haven’t been hurt in the market--it’s just that nobody’s making money,” he says.

Mutual fund-tracker Morningstar Inc. in Chicago bears that out. Despite the general feeling that everybody on Wall Street is doing something wrong this year, Morningstar’s tally of 1,093 stock mutual funds shows that 47% were beating the S&P;’s 0.8% positive return through the end of May. For one out of two funds to be ahead of the benchmark, even if by a small amount, is hardly a disaster.

However, some experts say that statistic masks the market’s other great problem this year: Those investors who are losing money are losing a lot , and the damage they’ve suffered has cast a pall over the entire market.

The stocks that have fallen the most in 1992 are some of the biggest “growth company” stars of recent years--drug firms such as Bristol-Myers and Merck, retailers such as Gap and Wal-Mart, and tobacco companies such as Philip Morris.

A host of money managers on Wall Street made their names from 1988 through 1991 by owning these stocks as they rocketed. But this year, those managers have watched in horror as the market has taken many growth stocks apart, one by one.

In many cases, the declines have been justified. Drug companies have found that they can’t raise prices with impunity any more, thus crimping their profits; retailers are struggling to attract consumers who have largely given up their spend-it-all ways of the 1980s; tobacco firms are facing new court challenges over marketing techniques.

Because these companies were so successful in the 1980s, they became some of the most-owned stocks in the market. So a large number of money managers and individual investors own at least one of the big growth stocks. And because the losses in the stocks have been so deep, these fallen stars have had perhaps a disproportionate negative effect on investor psychology in the first half.

Now, with renewed worries about a slowing economic recovery, the market’s slide this week seems like a natural--and overdue--reaction to some unpleasant facts: The old growth stars won’t supply any earnings momentum any time soon; the few industrial stocks that had risen on economic hopes won’t look so good if a slowdown does come to pass, and nobody really feels as if the market has worked right this year anyway.

Where does all of this lead stocks in the second half? Appel believes that investors will face more of the same--a very difficult market. Until and if earnings rise enough to justify stocks’ historical high valuations, there’s little incentive for buyers to get aggressive. It could be a long wait.

Why Investors Don’t Feel Good

Of the 10 largest stocks in market value, only two have outperformed the Dow Jones industrial average this year--a big reason why so many investors feel so lousy about the market.

Stock Dec. 31 Thurs. Change IBM $89 $94 1/2 +6.2% ATT 39 1/8 41 1/2 +6.1% Dow industrials 3,168.83 3,274.12 +3.3% Exxon 60 7/8 61 3/8 +0.8% GE 76 1/2 76 -0.7% Coca-Cola 40 1/8 39 5/8 -1.2% Procter & Gamble 46 7/8 46 1/8 -1.6% Wal-Mart 58 7/8 54 1/4 -7.9% Philip Morris 80 1/4 72 -10.3% Merck 55 1/2 47 3/4 -14.0% Bristol-Myers 88 1/4 65 3/8 -25.9%

Prices adjusted for splits where applicable.