A Stock Slide That Resulted From Rational Decisions SOME people say it's a post-election slump. Others call it the fiscal-cliff sell-off. But no matter how you characterize the recent stock slide - which shaved more than 700 points off the Dow Jones industrial average in a matter of days, before the market recovered last week - one label that doesn't fit is "panic selling." John Stoltzfus, chief market strategist at Oppenheimer Asset Management, points out that in previous market pullbacks in recent years, like the 2011 correction that sent the Standard & Poor's 500-stock index down more than 19 percent, "the markets seemed overly exuberant to the down side," Mr. Stoltzfus said. This time, he said, "the selling appears to be extraordinarily rational and levelheaded." How he can tell? For starters, if this were a classic, fear-driven, "risk off" trade, investors would have rushed into the most conservative investments - like Treasury securities and defensive stocks that pay high dividends. Yet one of the worst-performing groups in this sell-off has been the high-dividend telecommunications sector. Since the downturn began about a month ago, it has lost 4 percent, on average, while the overall S.& P. 500 is off about 3 percent. Mr. Stoltzfus says one reason for the poor performance of telecoms may have to do with valuations. Telecommunications shares, like dividend-paying stocks in general, have grown in popularity in recent years - so much so that the average telecom stock now trades at a historically high price-to-earnings ratio of 22, based on the trailing 12 months of earnings. By comparison, the P/E ratio for the overall S.& P. 500 is below 14. IT'S not just telecoms. Utility stocks, another defensive group, are down 9 percent over the past month. Like telecoms, utilities have been trading at historically high valuations. What's more, utilities are one of just three sectors where profits are down in the third quarter, compared with the period a year earlier. The other two are energy and basic materials - and they also happen to have performed worse than the broad market over the past month. In the meantime, "you haven't seen massive selling among the deep cyclical stocks like Caterpillar," said Pat Dorsey, president of Sanibel Captiva Investment Advisers. People haven't taken them out to the woodshed, which indicates a degree of rationality. James W. Paulsen, chief investment strategist at Wells Capital Management, agrees. "The performance of cyclicals and defensive stocks is almost the opposite of what you'd expect to see in a risk-off market," Mr. Paulsen said. It shows that this time around, investors are reacting more to the fundamentals than to sheer fear. He added that after posting spectacular gains over the past 12 months, "the market was simply looking to consolidate." The S.& P. is still up nearly 30 percent since last October. And with the crisis in Europe having quieted down, at least for the moment, and with signs that China's economic slowdown may be stabilizing, Mr. Paulsen said, investors have used the timing of the fiscal-showdown debate in Washington to take some profits. Even here, though, market strategists say investors have been reacting rationally. For instance, it remains to be seen whether the White House and Congress will agree about what to do about the automatic tax increases and spending cuts that are set to kick in at the start of 2013. If nothing is done, taxes on long-term capital gains, for example, are set to go back up to 20 percent from today's maximum rate of 15 percent. But even if Washington agrees to hold the line on the capital gains tax per se, the effective rate on most investment income of high-earner households is still expected to tick higher. As part of the Affordable Care Act, such income in those households will be taxed at 3.8 percent. Add that to the basic capital gains rate, and the tax for high earners will rise to 18.8 percent or 23.8 percent next year - depending on how the talks go. "People who bought stocks a year ago and are looking at 30 percent gains are also looking at a whole lot of uncertainty," said Duncan W. Richardson, chief equity investment officer at Eaton Vance. So the thinking lately among investors who need to raise cash, he said, is "to do some tax-gain selling rather than the traditional tax-loss selling they normally do at the end of the year."