| Topic - How Stocks Behave | Education Center |
HOW DO STOCKS BEHAVE? Let's put it this way: When it comes to mood swings, Wall Street is about as stable as your average adolescent around prom time.
Take most of 1998, when turmoil in Asia, slowing corporate earnings and a general sense of market vertigo all combined to create huge, unnerving price swings that shook even the most savvy investors. In August the broad S&P 500 index fell more than 20% in one of the most harrowing market episodes in recent memory. Then it rocketed back more than 30% to set a record by the end of the year.
Through it all, the media blathered on about the Dow this and the Dow that, as if "stocks" were somehow monolithic. Reality was that different groups of companies reacted to the turmoil in very different ways.
The chronic uncertainty of 1998, for instance, drove investors toward the big, time-tested companies of the Dow Jones Industrial Average that offered some sense of stability. Small companies, meanwhile, finished the year down almost 4%. The rise of the Internet and continued economic growth in the U.S. powered personal-computer makers to amazing new heights. But the stocks of oil-equipment companies plummeted as the Asian malaise cut into worldwide demand for crude.
These sorts of differences play out in the market every day. Prices ebb and flow 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 both broad strokes -- moon shots and presidential elections -- and minutiae -- plant closings and executive changes. That's why on any given day, the S&P 500 as a whole can soar on a strong economic report, while Dell Computer, a member of the index, swoons because of a mediocre earnings report.