TOPICS > Economy

U.S. Stock Markets Begin Recovery After Downturn

February 28, 2007 at 6:10 PM EDT

MARGARET WARNER: It’s been a tumultuous 48 hours on the world’s markets. The roller coaster began yesterday, when China’s benchmark Shanghai Composite Index plunged 8.8 percent. It was China’s biggest one-day drop in a decade.

At the same time, other Asian indexes caught the jitters. Japan lost half a percentage point; Hong Kong was down 1.8 percent. In Europe, where trading opens after the Asian markets close, the drop was sharper, down 2.6 percent by close of business. And in the U.S., the plunge was sharper still, down 416 points, or 3.3 percent, wiping out all the gains so far in 2007.

The recoveries today in the U.S. and Chinese markets covered only a fraction of yesterday’s losses.

Factors for slight recovery

Now, for some analysis of what happened today in the aftermath of yesterday's market plunge and what it means, we're joined by Nick Perna. He's the managing director of Perna Associates, an economic consulting firm in Ridgefield, Connecticut.

Welcome, Nick Perna. How do you explain what happened today? Or what explains what happened today, which is the U.S. market rebounded a little, but really only a little more than 10 percent of the losses from yesterday were recouped?

NICK PERNA, Perna Associates: A number of reasons, Margaret. Mr. Bernanke was quite instrumental in giving some confidence back to the markets. That was one thing.

And I think, when people had a chance to reflect on yesterday, it turned out that it wasn't as bad as it could have been. In other words, the market at one point was off more than 500 points. It closed off a little bit more than 400 points.

There was not chaos. Companies were able to settle their trades, so all the big, bad and ugly things that could have happened didn't happen. That was reassuring.

MARGARET WARNER: But at the same time, it didn't exactly rebound fully. What kind of factors were -- today, you had some downbeat economic news, the fourth quarter GDP being reassessed, recalculated from last year, and also the new home sales being down pretty sharply in January. Were those factors?

NICK PERNA: Yes, and I think that those kept a lid on whatever rebound would have happened.

Probably the more disconcerting of the two numbers that you mentioned was the housing sales number. See, the GDP number, the downward revision, was already widely expected and didn't surprise the market.

But the big drop in new home sales was disconcerting, because it made it more difficult for people to believe that the housing adjustment was nearing an end. The problem is, you have a lot of unsold homes out there. And when sales drop off like this, it makes it difficult to get rid of that inventory of unsold homes.

MARGARET WARNER: So were the markets saying today, essentially, that yesterday's 3.3 percent plunge was a needed market correction, that essentially some of the gains of 2007 have been a little excessive, or am I ascribing too much rationality to the whole process?

NICK PERNA: I think you might be, but I think another thing that was widely expected, if you listened to what the observers of Wall Street were saying in recent weeks, in the past couple of months, is that don't be surprised if there is some sort of a correction, because it's been a long time since we've had one.

And, you know, is a 3 percent decline enough to satisfy them? Is it a correction? We'll find out.

I think it is encouraging that we did rise today, despite some numbers, including an esoteric one called the Chicago Purchasing Managers Index, which came in weaker than expected. And what that did was it underscored the ongoing weakness in the manufacturing sector of the U.S. economy.

'More losers than gainers'

MARGARET WARNER: Now, explain, if you could, in layman's terms, when the market loses 416 points, who actually loses?

NICK PERNA: I love it. Well, if you bought in, you know, last July, you really didn't lose much because you're well ahead of where you were. If you bought in on Monday night at the close of the market, then by the end of Tuesday, you were a little bit poorer.

I think the easiest way to think of it is, in a sense, that 400-some-odd points of value simply evaporated. It's no different than if house prices fall, what happened to the value? Who got it? Well, nobody did; it just kind of disappeared into thin air.

MARGARET WARNER: So it's just in the total overall value, but it's not that someone actually loses or gains money?

NICK PERNA: Well, actually, you know, there were more losers than gainers. Everyone's portfolio, if they mirrored -- if they had an exact duplicate of the Dow Jones, was worth a little bit, you know, worth 3 percent less.

But I think the way most people look at this is not day-to-day, unless they're a day trader, and they're rare. The way they look at it is, how have I been doing over the last few years, the last year? And you're clearly still ahead at this point, and I think that that's very encouraging to people.

Fixing the computer systems

MARGARET WARNER: One other question about yesterday. Have they gotten to the bottom of this computer glitch that was reported to have triggered -- it looked as if the Dow fell 250 points in just three minutes. Have they gotten to the bottom of that? Have they fixed that?

NICK PERNA: Well, you know, all I know is what I've been hearing from the media. And, basically, it's amazing to me that that's all that happened in a day where you had record trading volume.

In other words, what happened was it was very difficult for the computers to keep up with the values as they were falling. And then what ended up happening was a backup computer came into play, and it suddenly made the adjustment, which made it look like there was a 200-point drop in a few seconds or a few minutes, as you mentioned.

But, to me, what was more important was that the computer systems functioned, trades cleared, financial institutions were able to settle. That's the big news.

Volatility with new markets

MARGARET WARNER: And, finally, the big lessons from yesterday. And bring in, if you would, the impact of the Chinese market plunge on the U.S. Are there lessons from that that might be different than, say, 10 or 15 years ago, in terms of American investors' exposure to the international market?

NICK PERNA: Sure. I think that, you know, it's been very popular to invest overseas, and that's not just a one-way street. There's a lot of volatility, particularly when you're dealing with new markets, as we're dealing with in the case of China and some of the other Asian countries. They almost inherently have more volatility than you're going to find here.

And because our economies have gotten so much more integrated, anything that happens there now affects us. A few years back, we were the one who dominated. And now it's much more mutual, if you will. That's one thing.

I think the other lesson to keep in mind is that stocks have some risk attached to them. Otherwise, why would you earn more on a stock portfolio than you do on a good, old, safe U.S. treasury bond? You get rewarded for enduring and persevering through days like yesterday.

MARGARET WARNER: Nick Perna, thank you for joining us.

NICK PERNA: My pleasure.