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STOCK MARKET TURMOIL Chemical stocks are outperforming market, perhaps because they already had been discounted

The stock market's huge slide of the past two weeks has cost investors dearly. The Dow Jones industrial

average, which hit a record high of 9337.97 on July 17, had lost 19% of its value by Aug. 31. And despite many wild swings, it was still down 18% as C&EN went to press, closing at 7682.22 on Sept. 3. The loss was in line with ana­lysts' July projections of a 20% correction in the Dow.

While the Dow was losing 18% of its value through Sept. 3, chemical stocks were outperforming the market. C&EN's seven-company chemical stock index, for exam­ple, fell just 12% between July 17 and Sept. 3. The index reflects the market value of Air Products, Dow Chemical, W.R. Grace, Her­cules, Monsanto, Rohm and Haas, and Union Carbide. Historically, the C&EN chemical stock index has shown itself to reflect the mar­ket trend of the broader chemical industry.

But chemical company stocks may have fared better than the market as a whole only because they already were discounted. Their performance in the months leading up to July's record had been only a pale imitation of the Dow itself, reflecting analysts' low opinions of the prospects for chemical company earnings this year. From the first of the year to July 17, C&EN's chem­ical stock index rose just 11%, compared with the Dow's 17%.

It's by now common wisdom that the big drop in the Dow during the past two weeks was precipitated by crises in Russia. President Boris Yeltsin sacked his prime minister on Aug. 23, causing a great deal of uncertainty over the fu­ture of the country's economic reforms. The government shake-up and the events that followed—an effective de­fault on bonds, a halt in currency trad­

ing, calls for Yeltsin's resignation, ram­pant rumors that he actually had re­signed, and parliament's rejection of a new prime minister—were seen as the triggers for the precipitous decline in the U.S. stock market.

But actually, the market decline had started more than a year ago, when nu­merous Asian countries went into finan­cial purgatory. Financial analysts point out that the record the Dow set on July 17 was not a result of investment in the

overall market, but rather a result of a "flight to quality" in which investors put their money in safe, large capitalization stocks, many of which make up the 30 companies on the Dow Jones index. In fact, analysts point out, on the day the record was set, most stocks on the broad markets were trading well below their yearly highs.

This was also true of many chemical stocks. On the day of the record, Air Products closed 26% below its 12-month high, Grace was off 22% from its high, Hercules was down 29%, and Rohm and Haas was down 14%.

On the few recent days when the market actually climbed, analysts had to stretch for an explanation. But when the U.S. market fell, analysts were quick with an opinion and usually right-on. The market was down, they said, be­cause of concern over corporate earn­ings. In the final analysis, anticipated earnings growth, or lack thereof, drives the stock market.

And in the past six weeks, the eco­nomic news—both foreign and domes­tic—has indicated that earnings will be negatively affected. That news centered on concerns over export markets, im­port markets, the ability of foreign coun­tries to pay their debts, and the lowest quarterly growth in U.S. gross domestic product in three years.

The Russian situation was essentially "the straw that broke the analyst's back." Estimates are that the bond de­fault in Russia will cost investors in those bonds some $33 billion. Particu­larly hard hit are banks in Germany and Switzerland—both good U.S. trading

partners. And further compound­ing the trade situation, the eco­nomic crisis has begun to spread to Latin American countries.

Hidden among all of the bad news coming out of Russia were a few items of good economic news last week. The Conference Board's index of leading eco­nomic indicators, the govern­ment's report on construction spending, and the monthly index from the National Association of Purchasing Management all im­proved, showing an economy that, while slower than last year, still has solid fundamentals and is not near a recession. Another bright spot for the stock market is that small investors seem to have stuck with it over the past few weeks, with most of the sell­

ing being done by mutual funds and in­stitutional investors.

Still, the stock market has long been used by some as a leading indicator of the economy. Its decline—earlier pre­dictions of a 20% correction seemingly forgotten—has some economists and analysts now saying that a recession for the U.S., spurred by worldwide finan­cial events, is in the offing. Some ana­lysts are even predicting a further de­cline in the stock market as companies fail to live up to third-quarter earnings expectations.

William Storck

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SEPTEMBER 7, 1998 C&EN 1 1