Stock market investors are a lot more cautious than the record trading volumes the past two days seem to indicate, Wall Street observers say.
Analysts said investors, waiting for an omen that an economic recovery was at hand but remembering how they were burned by volatile markets and two severe recessions in the past three years, are not taking big risks, but rather are buying the safe blue-chip issues.
"They're buying safety, quality and yield. They're not speculating. The money is in safe havens. Investors are risk-averse," said Larry Wachtel of the big brokerage firm Bache Halsey Stuart Shields Inc.
"The light is between green and caution," said Robert Neville Ginsburgh, a financial planner in Chevy Chase.
Individual investors were cautious yesterday. Most of the record 133 million shares that changed hands on the New York Stock Exchange were bought and sold by institutions such as pension funds rather than individuals. As a result, an early explosion in prices petered out, although the Dow Jones Industrial Average remained 37 points above where it closed Monday.
The surge in trading blue-chip stocks -- as well as a rally in the bond market that began six weeks ago -- was triggered by a steep decline in short-term interest rates. Those rates not only threatened the financial well-being of many companies -- and therefore their stocks -- they also enabled big and small investors alike to earn huge returns on their money without having to take the risk of putting their funds into long-term securities or less secure "growth" stocks.
Only if rates stay down -- as most economists now think they will -- will there be a sustained rally in stock prices.
The flight to safety and quality is evident not only in the stock market, but in the money market. Even though Treasury bill rates have declined faster than the rates on most other securities, cautious small investors are buying more rather than fewer Treasury bills. T. Rowe Price, the Baltimore investment company, said it has found that some of its own customers have begun to shift funds out of Price's money market fund (which is yielding about 13 percent) into its new fund that invests only in government securities. To get the safety of a government investment, these customers are giving up about 4 percentage points in return.
Money market mutual funds -- which enabled small investors to take advantage of the high interest rates that heretofore only large investors could get in the open market -- were the fastest growing investment vehicle of the past five years. These funds grew from virtually nothing to $220 billion.
Charles Fiumefreddo, executive vice president of Merrill Lynch mutual funds, said that he has detected no change in investor enthusiasm for so-called money market mutual funds in the last six weeks. This is because rates paid by these funds remain higher longer than those of other investments in a declining market.
But experts think that, as the yield on these funds declines, more and more customers will shift their investments to other areas, either trying to lock up the still relatively high rates on longer-term investments or buying stocks that not only pay dividends but might appreciate in value.
Apparently wary after huge gains in prices Tuesday, investors backed away yesterday. The Dow, which was up 18 points early yesterday, turned tail and ended the day down more than a point.