HOW DO STOCKS BEHAVE? Moody as hell.
Year 2002 was no exception: Technology and telecommunications stocks continued their freefall, while health-care stocks also plunged. And while investors may have happily withstood years of volatility in the late 1990s as they usually came out ahead, the new century has become known for something different: Giant swings that left their accounts in negative territory. The Nasdaq Composite index, which tracks many of the largest tech companies, shed more than 31% in 2002, right on the heels of its 21% loss in 2001. Meanwhile, the Dow Jones Industrial Average and the S&P 500 also experienced painful losses of 17% and 23%, respectively.
What happened? Stocks remained mired in a bear market that included the terrible shock of the Sept. 11 terrorist attacks. And while that was an exceptional situation, you should know that less-severe volatility is an everyday occurrence with the stock market. On any given day, or over any given time period, some stocks and sectors are going to be up, while others are down.
Just take a look at our applet. You'll see that different groups of companies reacted to the continued economic slowdown in mid-2002 in dramatically different ways. As the technology stocks of the Nasdaq plunged 35% from April through September, the blue chips of the Dow Jones Industrial Average held up somewhat better, dropping 26% during those months, as investors showed a preference for the safety of big, established companies. And when investors also looked for companies that might hold up in an economic downturn, they focused on stocks in areas such as real estate and banks. Both types of stocks provide investors with generous yields, even if their prices sag.
The lesson here? These sorts of differences play out in the market constantly. Prices change as investors absorb gobs of information and spit out minute-to-minute judgments as to how that news affects each of the stocks they own. The market reacts to broad strokes such as global conflict and presidential elections, as well as smaller events like plant closings and management changes. That's why on any given day the S&P 500 as a whole can soar on strong economic data, while, say, Dell Computer, a member of the index, swoons because of a mediocre earnings report.
Map Out the Market
SmartMoney.com's Map of the Market is a good way to view these relationships in action. It shows the price movements of more than 500 stocks at once, updated every 15 minutes throughout the business day. If you take some time to study it and return a few times a day for a week, you'll be able to watch the market's broad tides and smaller currents develop. It's about the best way we know of, short of visiting the trading floor, to get a gut feel for how stocks work.
If you looked at the Map for months at a time, you'd see that the seeming chaos of the markets tends to sort itself out into predictable patterns based on risk and reward. Small-company stocks, for instance, are traditionally quite volatile. But they also promise the richest historic returns over long periods of time. At the other end of the spectrum you'll find traditional utility stocks, which offer steady dividends and tend to be much less moody.
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The market reacts to both broad strokes -- global conflict and presidential elections -- and smaller events -- plant closings and executive changes.
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