Volatile week shows bull market’s fragility

Associated Press

NEW YORK

When it comes to the mood of the market, strategist Brian Gendreau called what happened Wednesday Exhibit A.

Stocks already were falling when the European Union’s energy chief warned of an impending nuclear catastrophe in Japan. It didn’t matter that few investors in the U.S. had ever heard of Guenther Oettinger or that other reports from Japan weren’t quite as dire. The Dow Jones industrial average fell 200 points in the next four hours.

“The market went up so far so fast, and investor surveys were showing a great deal of bullishness, the kind we often associate with the peak of a bull market,” says Gendreau, of the Financial Network, a financial advisory firm. “Whenever you’re fully invested in stocks — when everyone’s on one side of the trade, you’re very vulnerable to bad news.

“We got some bad news.”

The Dow Jones industrial average moved by more than 100 points four straight days last week. At one point, it gave up all of its gains for the year, as investors digested world events.

By week’s end, the Dow was again up for the year by more than 2 percent.

The message for investors: Get used to volatility like this.

U.S. companies, for the most part, are in good financial shape. Earnings are expected to be strong for the first quarter, and they’ve never had more cash. But world events — such as a nuclear disaster in Japan or a protest in Saudi Arabia — can quickly jolt investors.

The S&P 500 index is down roughly 5 percent since they reached their recent highs in February, according to Standard & Poor’s. That’s enough of a drop to qualify for what market technicians call a pullback. There have been 53 such losses of between 5 percent and 10 percent since World War II, according to Standard & Poor’s. Most pullbacks have averaged price drops around 7 percent, and required an average of two months to get back to even.

By that measure, the market could recover its losses before summer — unless something else happens to spook investors.

Higher gas prices, concerns about the impact of earthquake and tsunami on the world’s third-largest economy and the possibility of a government shutdown in the U.S. over a budget fight are things that would qualify.