The relief investors felt last week was short-lived as stocks declined Monday for the second consecutive trading session, heightening concerns that the worst may not be over.
The latest losses, among big and small stocks alike, continued to erase many of the gains that took place toward the end of last week and suggested no end in sight to the market's recent volatility.
Stocks of small companies, especially in technology, were hardest hit. The Nasdaq composite index, which consists of many of these companies, tumbled 16.29 points, or 1.5 percent. While the index closed at 1,081.39, well above its lows of last week, it remains down almost 14 percent from its high in early June.
The selling also spread to blue-chip stocks. The Dow Jones Industrial Average, for example, shed 35.88 points, or about 0.7 percent, to 5,390.94. The index fell by more than 50 points twice during the day.
Investors seemed particularly concerned about the possibility that individuals, who have been one of the primary forces behind the surge in stock prices over the last five years, had lost their enormous appetite for mutual funds.
"If you look at how the market has behaved this year, especially small-cap or aggressive growth stocks, it's been very much of a liquidity-driven bull market," said William B. Keithler, a portfolio manager for Berger Associates in Denver. The recent fall-off in the amount of money individuals have been pouring into stock funds "has people spooked," he said.
Without the rush of money into stock funds like aggressive growth funds, which have tended to be big buyers of technology and small-company stocks, investors are paying more attention to earnings and stock prices and are finding not much to like on either count.
They continue to be anxious over the outlook for corporate profits, especially in technology, which is suffering from a combination of summer doldrums and a recent spate of disappointing announcements by leading technology companies like Hewlett-Packard and Motorola. While stock prices have fallen, many stocks continue to trade at expensive levels.
"Nasdaq is under a lot of pressure," said David Shulman, chief equity strategist for Salomon Brothers. "Most folks are not done selling."
While many market analysts contend that it is far too early to tell whether individuals are abandoning the market in any meaningful way, recent reports suggesting the clamoring for stocks is dying down have increased the fear that the good times may be over.
Liquidity Trim Tabs, a newsletter in Santa Rosa, Calif., is estimating that investors pulled about $2-billion from stock funds from Tuesday through Thursday last week.
Anecdotal evidence from some of the major fund companies, however, suggests that many investors, encouraged by the short rally last week, were putting money into mutual funds by the end of the week.
The Montgomery Funds in San Francisco, for example, said there were more purchases than redemptions by Friday. At T. Rowe Price in Baltimore, investors began to put money into funds Thursday and Friday, and the complex ended the week with a "very modest net outflow," according to Steven E. Norwitz, a spokesman. The Vanguard Group ended the week with positive net inflows.
And some analysts argued there was little evidence that individuals were bailing out. "I think it is very premature and presumptuous to assume that individuals have stopped their love affair with stocks," said Alfred Goldman, the chief strategist for A.
G. Edwards & Sons in St. Louis. "Despite the stealth bear market in 1994, individuals continued to be buyers."
Shulman of Salomon agreed. "One week does not make a trend," he said. While mutual fund flows will slow in the second half of the year, compared to a strong first quarter, he predicted they would still represent the best second half in history.
But even if individuals are eager to put their money into mutual funds, investors are still likely to have a hang-dog expression for the remainder of the summer. Any slowdown in the economy is likely to crimp earnings, said Arthur A. Micheletti, the chief investment strategist for Bailard, Biehl & Kaiser in San Mateo, Calif.
Investors are also concerned the Federal Reserve will eventually raise interest rates, despite their initial enthusiasm last week over the remarks of Fed Chairman Alan Greenspan. "I think we'll go through this for the next several months: Will they or won't they?" said Micheletti, who predicted continuing volatility.
The forecast for the technology sector, which had led much of the rally earlier in the year, is not much sunnier. Market analysts say it is likely to remain in its slump until well after Labor Day.
"I think we're seeing the summer correction that we have not seen for two years," said Michael Carmen, the manager of the Montgomery Small Cap Opportunities Fund, who noted that the traditional seasonal slowdown seemed even worse this year compared with last year because of the introduction of Windows 95, which helped technology stocks during last year's dog days.
And some managers have been reluctant to start buying just yet. "It hasn't been as easy to pick off bargains as you might think or might like," Keithler of Berger Associates said. Unable to find stocks at good valuations, he has allowed cash in his fund to rise, he said.
Even Carmen, who described himself as a "net buyer of good stocks," agreed that some stocks continued to be too expensive for his tastes. But while he said he thought that the correction in small stocks was not yet over, he has been finding some stocks to buy.
The market decline hurt a broad variety of stocks, with declining stocks outnumbered advancers by 1,770 to 649 on the New York Stock Exchange.