August 31, 1998
The market sell-off continued on Wall Street as the Dow Jones Industrial Average recorded its second largest point drop in history, losing over 512 points on the day. Since July, the Dow has dropped 19 percent. Has the great bull market finally run its course? Phil Ponce and guests look at the stock market's recent decline.
JIM LEHRER: The stock market story and to Phil Ponce.
A RealAudio version of this segment is available.
August 27, 1998:
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August 26, 1998:
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August 11, 1998:
One World, One Market: Is globalization good or bad for America?
August 5, 1998:
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July 31, 1998:
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New York Stock Exchange
PHIL PONCE: Today's 513-point drop means the Dow Jones Industrial Average has now lost all the gains it's made this year. It's now down to where it was last November. Some insights now from three market watchers: Joe Battipaglia is chief investment strategist for Gruntal & Company. Michael Metz is managing director for CIBC Oppenheimer. James Glassman is a financial columnist for the Washington Post and a fellow at the American Enterprise Institute. Mr. Battipaglia, what happened today?
The Dow Jones Industrial Average has now lost all the gains it's made this year.
JOE BATTIPAGLIA, Gruntal & Company: Well, what happened today was a follow-on of the events of the last few weeks, and that is there's great concern about what comes out of Russia; we're worried about Asia; and of course the President's own issues in the U.S.. But when the Russians cannot rally around the nominated prime minister, that put the market into a negative mood all day. It was then exacerbated by what I call program traders, and that is investors who want to play trends. And once that kicks in, then falling leads to more falling, and the market fell mostly in that last hour.
PHIL PONCE: Mr. Metz, how do you assess what happened? How do you describe it?
MICHAEL METZ, CIBC Oppenheimer: Well, the market has been declining, I think, because of a deteriorating background for the last few weeks. Today I think it was largely motivated by internal considerations. I think most investors come into this decline with relatively limited amounts of cash, maybe over-leveraged, and now they're getting very anxious to increase their cash and reduce their exposure, and it takes a very strong emotional tone.
PHIL PONCE: So are you saying that investors basically, what, finally got scared by a confluence of circumstances?
MICHAEL METZ: Yes. And this is shown by the action of some of your stocks in NASDAQ, like Dell and Intel, and Microsoft, which had been holding up very well. But I think those holders decided they wanted to raise cash and to their dismay, they found out there were no aggressive buyers when they tried to unload. And then it fed on itself. Also, during the day, the market acted like it was ready to make some sort of rally. I think traders bought in expectation of a rally. When it didn't happen, they disgorged what they had bought.
PHIL PONCE: So, Mr. Battipaglia, do you see this as a correction to the bull market, or do you see it as the beginning of a bear market?
A deep correction of the bull market?
JOE BATTAPAGLIA: I see it as a deep correction of a bull market in a bull market, and the reasons are simply that the largest economies, the industrialized world, will continue to expand going forward. And they'll enjoy the benefits of low inflation, lower interest rates, and globalization. Now, globalization thematically has been misconstrued as a positive year in and year out forever. And the Asian miracle, where we had extraordinary returns there were just symptomatic of that expectation. Now we're getting into the hard work, where these economies do go to busts from booms, then they return back to booms, and also Russia has to be dealt with in terms of how we deal with the Eastern bloc entirely. So this is a process where the positives still greatly outweigh the negatives. The fear factor is that a recession is around the corner. If we avoid a recession, then the market will start to rally very strongly in the face of these events because there will be meaningful progress on one and all of these fronts, and I might add that the policy weapons at the Federal Reserve and the U.S. Treasury are quite significant, and they've yet to be deployed. The bond market is telling us that a rate cut is in order. I believe that that is the case, that we will see a lowering of interest rates, perhaps fifty to seventy-five basis points, in the next six to eight weeks. That would set up a framework, I believe, to provide global liquidity, stabilize currency relationships, allow the U.S. economy and the European economies to sail through this particular period, then, as the emerging markets return, start to talk about the expansion that exists in '99 and beyond, a very bullish scenario.
PHIL PONCE: Mr. Metz, clear sailing?
MICHAEL METZ: I don't like to be frivolous. But I think Mr. Greenspan is absolutely irrelevant to prospects for Latin America, Southeast Asia, Russia, and so forth. The real problem here is that the American market has been fed by the illusion, I would call it, of a so-called new paradigm, that is, we live in a new world, and there's no political instability; there's global economies. There are free markets operating effectively. There's never-ending expansion and poor profit margins, never-ending momentum and profits, and a never-ending flow of money by individuals into the soft money. I think all of these assumptions now are highly questionable, if not inaccurate. Even more importantly, you've had over $2 ½ trillion in wealth destroyed over the last few months by the American stock market. In my judgment this will have an impact on the real economy. Remember, in the second quarter of this year the American consumer spent much more money than he was earning in the sense that the growth in spending exceeded the growth in earnings. What happened is savings rates fell to the lowest level in a generation, admittedly, a new way of determining them. But the net result is that the American consumer, in my judgment, has been spending his unrealized capital gains. I believe that we're going to have a disappointing growth in personal spending. We're going to have some slowdown in growth in capital spending and a rather difficult environment for exports. This is not consistent, in my opinion, with a strong economy.
PHIL PONCE: James Glassman, what does the average investor, the average consumer to make of this?
JAMES GLASSMAN, Financial Writer: Well, I think the average investor should, first of all, only be in the stock market if he or she is in for the long haul, which I would define as seven years and ten years and beyond. And in that case what happens today or what happens on any individual day or week or month really doesn't mean very much. I mean, it certainly scares you, there's no doubt about that, but that impulse to sell at a time like this is one that ought to be resisted. There are two things that you ought to do. First, you ought to look at companies that you own, and I say the companies that you own, not the stocks, but the underlying companies, and see whether something's happened to those companies in the last few weeks or few months that justifies this kind of decline. And if there is, maybe you should consider selling. In most cases there won't be. Second, you should be looking for bargains. There may well be some very good bargains out there. And I say this not as somebody who's making a prediction about whether we're in a bull market or a bear market or what's going to happen this week or the week after-I'm not smart enough to figure that out-but as somebody who believes that Americans should participate in the growth of good companies by owning stocks.
PHIL PONCE: Mr. Battipaglia, time for bargains tomorrow, perhaps?
JOE BATTAPAGLIA: Yes. As early as probably 10:30 to allow the first hour to take on the more panicked element of investment, but then we start a process of recovery. I like to frame this in the context of post World War II, where we came out of a war victorious, but most of the economies were flat on their back, and, even worse, there was a specter of Communism enwrapping and engulfing the globe. We are at a point now where, indeed, economic growth has great vitality in the industrialized world. The United States is being looked for leadership in the emerging markets. And we don't have the threat of a Cold War. It's not an ideological issue. Freedom is reigning supreme. There will be bumps along the way, but therein lies the opportunity. That's why Europe has moved to a Euro to come up with a common currency to help that marketplace. You've seen Argentina use the dollar as a substitute currency. You're going to see a lot more of that. And the United States has come to this point, now running surpluses, having a strong currency, and the ideological leadership to get this done over the course of years. The opportunity looks greater now over the next 30 years than they did after World War II.
PHIL PONCE: Mr. Metz, how about the opportunity tomorrow, in the short term?
Mr. Metz: "I would say the world is more dangerous now than it was before."
MICHAEL METZ: I don't know about tomorrow, but as an old curmudgeon, I would say the world is more dangerous now than it was before. I think the whole financial environment is given to more instability. I think the idea that free markets are going to be adopted by people who for generations never heard of democracy or free markets, and that they're going to function efficiently, that the hundreds of billions of dollars floating around, hot money looking for amusement by destroying currencies or economies, is going to result in efficiency. I think this is an illusion basically, in my judgment; the market is still assuming that everything is going very well for the next five years, and I think the investor should be rather cautious here.
PHIL PONCE: James Glassman, do you have a sense of what the public is feeling? I mean, is there-is it fear? Is it anxiety? How would you describe it?
JAMES GLASSMAN: I think there's a lot of fear and a lot of anxiety. When you say the public, you mean people who own shares.
PHIL PONCE: Sure.
JAMES GLASSMAN: And about half of Americans now own stocks, and I think that the majority of them have not gone through anything like this. And they're certainly frightened, although they've been taught year after year by the mutual fund companies and by commentators on television and in newspapers, people like me, to hang on, maybe to buy on dips. And we'll see what they do. Certainly up to this point they have held on. Whether they're going to continue to do that or not, I just don't know. And really a lot depends on what happens in the real economy. You know, the stock market is often a harbinger, very frequently a harbinger of what's gong to happen in the real economy. When the market goes down 19 percent, that is sometimes a pretty strong indicator that we could be headed toward a slowdown or a recession. We also have an inverted yield curve. In other words, interest rates are higher on the short-term than they are on the long-term. That's also a bad sign. So we could be headed for bad economic times--
PHIL PONCE: So James Glassman, what do you say to-
JAMES GLASSMAN: That would disturb a lot of people.
PHIL PONCE: What do you say to those then who look at the local interest rates, look at the low inflation, and say, things on Main Street are fine, therefore, things on Wall Street should be as healthy as Mr. Battipaglia is talking about?
JAMES GLASSMAN: Things are fine, and I think that the debate between Mr. Battipaglia and Mr. Metz is a very good one. The question is: Have things changed fundamentally because of globalization, because of new free flow of capital, because there are so many capitalist countries in the world, or, you know, are we going to have the same kind of cyclical downturns that we've had in the past? And I don't know the answer to that question but certainly the market is beginning to tell us, yes, things could easily slow down.
PHIL PONCE: Mr. Battipaglia, one of the old rules of thumb is that when the market drops 20 percent, as it has in the past month or so, that's often an indicator of a bear market. As somebody who's been bullish, what would it take to convince you that maybe things have changed?
JOE BATTIPAGLIA: We would have to have a recession in the United States or a significant credit crisis. And I don't see the conditions evolving for that. Indeed, if you go back over the history of this particular bull market, each and every correction, including the big one in '87, was sharp, deep, and very short-lived, and we came out of the '87 crash, for example, saying that the real economy would be adversely affected. And, of course, it wasn't, and the market went on to sail to higher highs. We were making fun just a few weeks ago about the "Wag the Dog" scenario in the political realm. Now we're saying the same thing about world economies. Let's not forget that the United States and Europe are the dominant economies by far, by any way you want to measure it. Their strength is what will stabilize world economies. And it's not the weakness in Southeast Asia or Russia that will determine the economic health of those environments. So this short, deep correction is consistent with the ones we've experienced in '87, '89, even in '94, and even last year in October, when we had the first scare about Asia.
PHIL PONCE: Mr. Metz, a short, deep correction?
MICHAEL METZ: I really don't agree. I don't know, of course, but I really think the world is much different now in the sense that not for a generation or more have you had such a high exposure to the equity market by the American individual. You know, there's a myth about the baby boomer saving more money. Actually he hasn't. He's depended on the stock market to do it for him. Never before have people been so exposed, their wealth, to this variable. Moreover, never before has the market been so overvalued. Never before has it assumed a perfect scenario ad infinitum. I'm not giving you an Armageddon thesis, but to me the market is still not on a bargain counter. And, frankly I find what's going on in the emerging nations, which is the marginal buyer/seller that determines prices, I find this has rather ominous implications for economic growth for Europe and the U.S..
PHIL PONCE: James Glassman, very quickly.
Mr. Glassman: "There are a lot of signs that the real economy is headed for a slowdown."
JAMES GLASSMAN: I was going to say, I mean, the small investor, in fact, could be the savior of this market. I mean, Michael Metz is right. There has been a change in who owns stocks. But it could well be that small investors may be willing--because they have their money in for retirement, most of them, because they're not checking where their funds are every day--may be willing to be patient, as they have been taught, and what we've seen so far has been that they are. And they could really actually hold up the market. But I think the most important thing is the real economy. And we just don't know about that, but there are a lot of signs that the real economy is headed for a slowdown, including some numbers today from purchasing managers.
PHIL PONCE: Gentlemen, that's all the time we have. I thank you very much.