A WILD RIDE
October 28, 1997
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.
PAUL SOLMAN: TV crews set up early this morning on Wall Street, ready for the worst. Police had been brought in from around the city should things get out of hand. As the day began the street's usual denizens were in a hurry.
PAUL SOLMAN: What are you expecting today?
MAN: No comment.
PAUL SOLMAN: We did, however, snag a couple of market forecasts.
FIRST MAN: Sell off in the morning--it'll come back. Don't worry about it.
PAUL SOLMAN: What are you expecting today?
SECOND MAN: A lot of trouble again.
PAUL SOLMAN: A lot of trouble?
SECOND MAN: I think so.
PAUL SOLMAN: Out-of-towners, meanwhile, were lining up to see the stock exchange in what might prove the tourist opportunity of a lifetime.
TOURIST: We're delighted that we are here today with all this commotion going on.
PAUL SOLMAN: So you're excited?
TOURIST: I'm excited.
PAUL SOLMAN: You're pumped?
SECOND TOURIST: Oh, sure, really am. We're waiting to see it all fall down through the ground.
PAUL SOLMAN: Are you rooting for it all to fall down?
SECOND TOURIST: Not at all, no, because it means all my shares go down in England.
PAUL SOLMAN: That suggested today's worst case scenario; that overnight plunges on world markets would drive Wall Street lower, thus further shaking investors everywhere, reversing the global investment boom of recent years and maybe even killing the dream of post Cold War global free market prosperity. No wonder the whole world was watching. At 9:30 sharp the market opened. The bell ringers were chipper but from the get-go the Dow dove, plunging more than 100 points in the first few minutes. Deja vu Day two, it seemed, but to us a good time for some basic questions to PaineWebber's Mary Farrell.
PAUL SOLMAN: How do prices actually decline here on the stock market?
MARY FARRELL, PaineWebber: Well, it is literally an auction market on the New York Stock Exchange. There is a specialist, who controls the books; he's responsible for the trading of a certain number of stocks, and then the representatives from the brokerage firms bring their "buy" and "sell" orders to that specialist. He tries to match them. So what happens on a day like yesterday you have far more sellers than buyers and, therefore, you see the stock price decline.
PAUL SOLMAN: Where does a trillion dollars' worth of world stock values go? I mean, did the money simply vanish, disappear, what happened?
MARY FARRELL: People are constantly evaluating the value of stock. You're holding ownership in a company. When you own Merck's stock, you own a piece of Merck; you are an owner. And people constantly assess what is the value of that ownership to establish the price. As of yesterday people determined it was worth a lot less than it was the day before, but that can also change. At some point people will decide that the future earnings and dividends of Merck are worth more money and go out and use that as a buying opportunity.
PAUL SOLMAN: By the time this interview ended, though, the Dow had turned around. Journalists offered various explanations: IBM buying back $3 billion worth of its own stock; President Clinton underscoring the health of the economy; and that old standby--bargain hunting because stocks had simply become so cheap. That prompted a simple question to financial journalist Pat Widder of the Chicago Tribune. Do people really know what moves the market day to day?
PAT WIDDER, Chicago Tribune: They don't have a clue. We who cover things like this write and talk to people like you and say, oh, it means the Asian currency crisis or profit taking or dressing up earnings or something like that, but nobody knows. Markets are made up of millions of sellers and buyers, and on any given day of any given minute, they're all making decisions based on what they think might happen.
PAUL SOLMAN: But then why do we report and hear on the news minute to minute accounts and explanations of why the market is going one way or the other?
PAT WIDDER: Because people have a desperate need to know what's going on, and we need jobs.
PAUL SOLMAN: If Pat Widder seemed upbeat, the market was beginning to appear, well, exuberant. The Dow was back to even by 10:24, up over a hundred points by the time we left the floor minutes later. Out on the street passers-by didn't yet know about the rally. Still, they seemed economically unfazed by all that had happened thus far.
PAUL SOLMAN: Did you contemplate changing your behavior, your consumer behavior at all, after yesterday?
MAN ON STREET: Not at all. The only thing I contemplated was taking all my stock out of the stock market, and that's consumer behavior. I called up my brother, who's my stock broker, and he convinced me not to do it.
ANOTHER MAN ON STREET: I have confidence in the American economy, and I think it's going to hold, not just going to go down.
PAUL SOLMAN: Meanwhile, the Dow kept rising and by day's end more than a billion shares had changed hands, by far the most volume ever. The Dow Jones Industrial Average was up 337, its biggest point gain ever. That's an increase of 4.7 percent, which sounds like a lot but turns out to be only the 70th highest rise percentage-wise in the history of the Dow.