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The U.S. stock market rebounded in grand fashion with a 337 point gain, the largest single-day point increase in history. After a background report by Paul Solman, Phil Ponce talks with two economists about Wall Street's wild ride.

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PHIL PONCE: And for more on the market swing and the economy we're joined by David Levy, director of forecasting with the Jerome Levy Economics Institute at Barr College, and Bruce Steinberg, chief economist for Merrill Lynch. Welcome both. Mr. Steinberg, we just heard several reasons why the stock market might have bounced back. What do you think was key?

BRUCE STEINBERG, Merrill Lynch: Well, you have a climactic sell-off as took place on Monday. A lot of market professionals thought that the market would probably go up today; they couldn't be sure, you never know, but after going down so far yesterday, there are a lot of bargain to be found.

PHIL PONCE: What do you say to the belief that a lot of the small investors also didn't panic; that they hung in there?

BRUCE STEINBERG: Small investors have shown a lot of common sense. They know the markets can be volatile; that they can go up and down. They didn't panic yesterday and today they were among the people taking advantage of the stocks that were selling at the distance.

PHIL PONCE: David Levy, is the roller coaster ride over? Can people relax now?

DAVID LEVY, Jerome Levy Economics Institute: I wouldn't relax. In any case, I wouldn't panic either. I think there's a lot we don't know about how this market's going to behave. What's significant is that we had a market that's had a tremendous rise. Over the past 15 years it's increased tenfold. It's just an extraordinary rally, doubled in the last two and a half years, and it's now showing a great deal of volatility. Over the last three months we've seen what looked like an invincible boom starting to show some kinks and some cracks. We don't know for sure that this is the end of the bull market, but it's enough, I think, to get our attention, and if it is, markets don't necessarily go straight down. It's not unusual to have a bounce. So I think one has to reassess what one's time frame is, what kind of risk one can take, and be rather sober about it.

PHIL PONCE: Bruce Steinberg, do you think this was a bump in the road, or is it something more major? Is it--is it the sign that the bull market is ending and the bear market is about to be upon us?

BRUCE STEINBERG: When you have events like took place over the last couple of days, it's likely the markets are going to remain volatile for a while. I don't believe the bull market is over. You know, the key fact here is that the U.S. economy remains in excellent fundamental shape, and I think as we go forward, the stock market is going to reflect that fact.

PHIL PONCE: Do you agree that overall the U.S. economy is in strong enough shape to weather this out in a positive way, sane trajectory?

DAVID LEVY: Well, I think the economy is poised to slow down, at least in 1998, and there are some worries. While we can look at a very strong performance in the rear view mirror, a lot of the stimulus to this rise has come from exuberance, whether it's rational or not, from a household sector. Tremendous use of credit from--and refinancing of mortgages and so forth to finance spending in ‘93, ‘94, ‘95, and increasingly, as the credit boom faded, euphoria over stock market portfolios, leading consumers to spend. The savings rate keeps going lower and lower. It's a fragile situation. If something does undermine the confidence of consumers, we could see a very serious setback in consumer pending. In addition, our trade outlook is reason for concern even before the latest events in Asia. Asia before the latest crisis had its vulnerabilities. Exports to that region are already being aggravated by a somewhat stronger dollar, are likely to slow down, whereas, imports reflecting the strong demand we've had recently are likely to pick up. In other words, we're going to have a lot of foreign--more foreign goods coming in and relatively a slower pace of our sales going out. So I think there are some concerns in our economy.

PHIL PONCE: Bruce Steinberg, getting back to the issue of consumer euphoria, I mean, is this the kind of correction that people said was inevitable, that it should happen every 18 months or so, and that the market was overdue?

BRUCE STEINBERG: Well, this is the first major correction that the market has had since 1980. That is, the longest that the market has ever gone until now, without a 10 percent correction. So that has happened now. I think that David is being overly alarmist in his views of where the U.S. economy is actually going. It is healthy for the economy to slow down. Federal Reserve officials have been warning us that they think growth has been too fast. Growth will slow down, and it's going to be a good thing that it does, and I think that the economy remains quite well balanced.

PHIL PONCE: David Levy, over-alarmist?

DAVID LEVY: Well, I didn't think I was being alarmist. You know, if you look at even a slowdown and look at just, for example, consumer credit or the rate of inventory growth and you realize how much we have been relying on this fairly rapid growth to keep a record rate of delinquencies on credit cards from going even higher, if you look at the--an inventory growth rate, which--I'm not saying inventories are too high yet, but a rate that cannot be sustained if the economy slows down, there are parts of this economy that are going to be a real drag if we don't meet expectations about earnings growth, stock market performance, you know, how we're doing --looking backwards is not always a good way of looking forward.

PHIL PONCE: Bruce Steinberg, was this a crisis that the stock market just went through, or can one expect to see these kinds of volatile swings again in the future?

BRUCE STEINBERG: Well, you have to remember that recent equity market events, the U.S. stock market and all the global stock markets, had been triggered by a real economic event, a real economic event that is taking place in Asia. The world economy has been basically moving along on two engines for the last half dozen years or so. One engine has been the U.S. economy and the other engine has been the Asian economy. Asia has just hit a wall. It's not growing anymore. That is going to slow down the whole world economy, but, again, it is not a bad thing that the U.S. economy is going to slow down. Alan Greenspan and his colleagues at the Federal Reserve until just a few days ago were running around the country telling us that they thought growth was unsustainably fast. Now, when Federal Reserve officials say that, what they're telling us is that unless growth slows right now, they were going to raise interest rates. Well, now they're not going to raise interest rates because there is a slowdown in growth that is coming that does not have to be inducted by the Federal Reserve raising interest rates. Instead, it's likely that interest rates are going to be going down from this point forward. So we're going to get a moderation in U.S. economic growth, but if the economy hadn't moderated on its own, which now I think it will do, the Federal Reserve would have made it moderate by raising interest rates, which would have been a lot more painful for us at least than the way that it's going to happen right now.

DAVID LEVY: Bruce, I'm alarmist, I think you're complacent. Economies slowing down can throw a lot out of sync. The rate of inventory growth I mentioned earlier--capital spending has been right alone assuming continued growth in earnings, which is not consistent with the kind of slowdown that is going to prevent labor markets from overheating in the view of the Federal Reserve. The idea that we're going to talk this tight rope with just enough growth to keep earnings up and the stock market, which I believe is a real lynchpin behind the consumer, who is the real engine of this expansion, I think is hoping for something which, while not impossible, is going to take quite a degree of good luck. And you maybe have a bigger rabbit's foot than I do. I don't know.

PHIL PONCE: How about that, Mr. Steinberg? How would consumers be affected by what happened--

BRUCE STEINBERG: Let's just take a look at where our economy actually is. We've got the lowest inflation rate in 32 years. Inflation has never been this low, so far--

DAVID LEVY: But inflation is not--

BRUCE STEINBERG: We're growing at a very nice clip--from the point of view of again the central bank--the Federal Reserve--has been too fast for our own good, and it needs to slow down, which, again, it's going to do right now. I'm not saying everything is going to be perfect and everything is going to work out just okay. I mean, the market has gone through an event that may have some further ramifications, but at base the economy--the U.S. economy--has not been in as good shape as it is right now in at least a generation and probably ever. Now are things going to always remain good? Of course not. But in terms of what's going on, what's likely to happen in 1998, a base case, I think the best base case is that the economy is going to continue to grow more slowly than it was growing in 1997 but still decent growth. Corporate earnings are likely to go up, and interest rates are likely to come down. Now that's a pretty good environment.

PHIL PONCE: Short term, David Levy, what do you think is going to happen to the stock market?

DAVID LEVY: I don't have a strong opinion as I'm not a stock market forecaster. I do believe we'd had a bubble which has now at least sprung a little tiny leak. Whether it's going to be a long, slow process or a violent one, I don't know, but I think we've turned a page in the chapter from the euphoric performance we've seen over the last several years.

PHIL PONCE: Gentlemen, I thank you both for joining us.

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