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| THE STOCK ROLLER COASTER | |
 May 28, 1999 
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JIM LEHRER: Wall Street took quite a ride this week. Monday, the Dow Jones Industrial Average closed down 174 points; Tuesday, another 124; then Wednesday, up 171; Thursday, down 235; and today, back up 93. And there was the additional news that the NASDAQ market will have an evening stock-trading session, the first move toward what could become a 24-hour trading day. To help us sort through this, Gretchen Morgenson, who covers Wall Street for the "New York Times." Gretchen, welcome. GRETCHEN MORGENSON: Thank you, Jim. JIM LEHRER: Up, down. GRETCHEN MORGENSON: All around. JIM LEHRER: All around? What's going on? GRETCHEN MORGENSON: Well, first of all, you have to remember we're at very high levels on the Dow. When we're in the 10,000, 11,000 area, 100 points, 200 points is not as large as it may seem if we were down in the 5,000 area. But we are seeing a lot of volatility, a lot of moves, and it is disconcerting to investors. However, the Dow Jones is still up 15 percent for the year, which is a sizable gain. JIM LEHRER: So when it goes up and down, up and down, the end result is still very much up, is that correct? GRETCHEN MORGENSON: It has been, yes. We hope it will continue of course. The NASDAQ has had even more volatility, because it consists of a lot of untried, untested smaller technology companies, whose fortunes are a little bit more unpredictable than the big blue chip companies that make up the Dow Jones Industrials. JIM LEHRER: But the point you made a while ago, before it got into the 10,000, almost 11,000 range, 100 points or 200 points was -- either way - whether it was up or down -- was considered a huge deal. But it's not as big anymore, percentage-wise, right? GRETCHEN MORGENSON: That's right. And that's the way you have to look at it. But I think that investors are concerned when they see these kinds of moves, and Thursday's move down 235 points, as you pointed out, was the biggest point move down for the year. I think it reflects, Jim, a very deep concern about interest rates. That is really what's driving the market's uncertainty here. And we have had ever since the crisis last fall, the world crisis in emerging markets, we've had a very accommodative Federal Reserve policy. They've been easing rates, as a matter of fact. Three times in I think two months last fall. Now we hear in the last meeting that there is a concern that inflation may be around the corner, at least some signs of it, some straws in the wind. So we have a Fed that has changed its bias, is the word everyone uses too, from accommodative to possibly more restrictive. And if interest rates go up, that's bad for stocks. JIM LEHRER: Yes. And why is that bad for stocks? Make the connection. GRETCHEN MORGENSON: It's bad for stocks, because companies borrow money to fund their operations, and as interest rates rise, their borrowing costs rise. Anything that cuts into profitability, like an increased borrowing cost, means earnings will be down. But, furthermore, it impacts stock prices, because investors who see higher yields on bonds think to themselves, well, maybe I should take a little bit of money off the stock market table and put it into a slightly more conservative investment that is yielding more than it was, say last month or the month before. JIM LEHRER: All right. Now let's go back also to explain to those who don't watch this every day, follow this every day, the Federal Reserve in this last meeting did not actually raise interest rates for inflation. GRETCHEN MORGENSON: No, it did not. JIM LEHRER: But for the first time they said, hey, look, we're thinking about it, essentially, is that correct? GRETCHEN MORGENSON: Correct. They were looking at things that made them concerned that there may be some inflation coming down the pike. And so they don't want to wait until it smacks them in the face to do something. So what they're basically warning is that they're on the lookout for it, they're alert for it, vigilant, and they're going to act if they feel it's necessary. Prior to that meeting, it had been, as I said, very much the opposite. JIM LEHRER: Do the people, professionals on Wall Street that you talk to regularly, are they now just accepting the fact that this market is a "volatile" market, we're just going to have these ups and downs and that's just part of doing business? GRETCHEN MORGENSON: Yes, they are unfortunately. I don't know what you do about it. We have had very high gains in the market for the past three years, but in addition to those gains, we've also seen this increase in volatility. But I'll tell you, people seem to be riding with it, because you've got more investors in the market than ever before. JIM LEHRER: Now, you mentioned the NASDAQ market, and that's driven by the incredible interest in anything that has to do with the Internet right? GRETCHEN MORGENSON: Well, a lot of the Internet stocks are front and center with investors right now. Of course, the NASDAQ is I think 5,500 companies. So there are plenty of companies on that market that have nothing to do with the Internet. But the Internet has taken the fancy of investors to such a degree that that is, yes, what most people talk about when they talk about NASDAQ. JIM LEHRER: Now, do they also talk about -- when they talk about Internet stocks -- do they talk about its is ago permanent, or do they talk about it as, oh, this is something you've got to get on quickly because it may fade? I mean, what do they think about it? GRETCHEN MORGENSON: You know, Jim, the interesting analogy that people say, the Internet is where radio was the 1920's. JIM LEHRER: Oh, my goodness. GRETCHEN MORGENSON: It was one of those events, and they don't come around very often. And this is why people are so entranced with the Internet is that it is an industry that has potential that people cannot even measure. And what that means is it's going to change the way the world works, change the way everything works. And so you don't, you can't even measure what it might do for businesses. This is what begins to explain the valuations of these stocks that are at tulip-bulb mania levels. JIM LEHRER: Tulip-bulb mania, what does that mean? GRETCHEN MORGENSON: One of the biggest manias of all time in the financial markets was tulip bulb mania in Holland in the 1600's, I believe it was, when tulip bulbs were selling more than houses. Anyway, it's one of the manias that people point to. Internet mania has been a mania, because people believe it is going to change the way we do things. And, with that in mind, they say, well, the sky's the limit about what these stocks should trade at. JIM LEHRER: And those are stocks like Ebay, with which is the auction Internet service, Amazon.Com. GRETCHEN MORGENSON: AOL. JIM LEHRER: Yes. Anything having to do with this - GRETCHEN MORGENSON: Yes. JIM LEHRER: -- is very - goes up and down quickly. Now, speaking of NASDAQ, they announced yesterday that they're going to have evening trading sessions; why did they do that? GRETCHEN MORGENSON: I'll tell you. It's a couple of reasons, I believe, Jim. One is that the world, it's becoming a more globalized investment arena. We are going to have markets that trade 24 hours a day. In fact, right now you can pretty much trade a lot of stocks 24 hours a day, whether it's in Europe, Japan, a lot of the companies on the big board, you can trade these all night long. So I think that a lot of these markets, like NASDAQ and New York Stock Exchange has also mentioned they're going to try this evening hours; they're doing it out of a defensive posture to try to maintain market share, as it were. They want people to be trading on their venue. JIM LEHRER: Rather than to go, here again on the Internet, right? GRETCHEN MORGENSON: Or overseas for that matter. JIM LEHRER: Sure. GRETCHEN MORGENSON: The other thing I believe that's fueling it is that there are so many people who trade on the Internet who don't trade during the day but come home, analyze their investments on their computer and then want to make a change, want to make a buy or a sell, that they believe they should have access to these markets when they want to buy and sell. JIM LEHRER: Sure. GRETCHEN MORGENSON: And so it's all again part of the Internet having an impact on the way people think, and these marketplaces want to be able to give these people access if they want to trade. JIM LEHRER: Is there any end-formed wisdom on what impact a 24-hour market or even a beginning step, an evening market would have on stock prices in the markets generally? GRETCHEN MORGENSON: Well, back to where we started, unfortunately, which is volatility. I think initially when you have evening marketplace, you're going to have far fewer investors in it, you're not probably going to have the institutions that buy and sell all day long, the mutual fund companies, the pension funds. You will have small individuals who - as I say -- come home from work and want to trade. That means that they will have a small -- far smaller pool of investors to choose from, to trade with. That will increase volatility, make it more difficult for to you get in and out of your stocks at prices that do not move the market. JIM LEHRER: Now, is that a good or bad thing? GRETCHEN MORGENSON: Well, it's not a good thing initially because it increases your costs. I think that will be a factor. Any kind of a new switch like this, I think that would be a result. But I think, you know, it's inevitable to a degree, and I think we just have to make sure we have the infrastructure, the systems in place to make sure there aren't breakdowns, to make sure there is a paper trail, to make sure everyone's transactions are effected efficiently. JIM LEHRER: Okay. All right. Do you agree that this is going to eventually result in a universal 24-hour stock trading system? GRETCHEN MORGENSON: It very well could. I don't believe that I think a lot of Americans want to straight stocks at 3 in the morning, but maybe five do and five should be allowed to do so. You know, it's the old traditional marketplace is really breaking down here, and I think that's interesting and it's inevitable. So you might as well not fight it, might as well join it. Let it happen. JIM LEHRER: Thank you very much. GRETCHEN MORGENSON: You're welcome. |
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