|MAKING A DIVE|
October 15 ,1999
RAY SUAREZ: Today's big market drop left the Dow Jones industrial Average off 630 points, or almost 6 percent for the week, and the NASDAQ index down 155 points or 5.3 percent. With two quite different views of what's going on, we're joined by David Jones, chief economist at Aubrey Lanston, a government securities trading firm; and Kevin Hassett, a former Federal Reserve Board Economist, now with the American Enterprise Institute. He is co-author of the recent book, "Dow 36,000."
RAY SUAREZ: David Jones, a lot of emphasis has been put on what chairman Greenspan had to say, but was it more the Producer Price Index that was giving the market the jitters today?
DAVID JONES: It was really a combination of the two, but I would say that first and foremost that surprising news on the inflation side was really a key factor pushing stock prices down because the follow through there is that when inflation begins to move up, usually we can count on higher interest rates and perhaps even at some point, those higher interest rates will be reinforced by some Federal Reserve rate hikes as they move to tighten credit. And the stock market never can work well in an environment of rising interest rates. Also the Fed chairman's remarks had some bearing, certainly, on the market and the big decline.
RAY SUAREZ: Well, he's been calling for a more rational pricing of securities for a long time. Why would last night's statement suddenly make so much of a difference?
DAVID JONES: In part because we had already seen both in Europe, actually, and the U.S., some signs of rebound in economic growth, cyclical strength actually in Europe, as well as strong growth in the U.S., perhaps hinting at least that higher inflation and higher rates. And therefore, the stock market was already in a period of what we'd have to call correction. So it was very sensitive to Chairman Greenspan's comments. The tone of your question is correct, however. Fed Chairman Greenspan has been saying for a long time that the market has been, well, as he started to say, irrational exuberant back in December of 1996 up through his most recent comments in which he suggested that the market should place a higher premium on risks in the stock market, particularly risks that stock prices would call.
RAY SUAREZ: Well, Kevin Hassett, your thesis would counsel exuberance but not irrationality about where the Dow is going. It's down 10 percent off its peaks from earlier in the year. What are we to make of this?
KEVIN HASSETT: Well, remember, Ray, that the market doesn't go up and down. It goes up and down and up again. And in the short-term, the stock market is a very risky place. You know, it could be that the current correction isn't done; but long-term investors should keep their money in the market. And I think if someone were to ask Chairman Greenspan do you think that long-term investors should be in stocks, that he would say yes, still.
RAY SUAREZ: Well, in 1987 we had a bad Friday in that fateful week in August. And then on Monday everybody rushed back on to the trading floors and then we saw what a decline really looks like. Should we be worried about that this week?
KEVIN HASSETT: Well, it depends who you are. The Federal Reserve should certainly be worried about something like that because near term distortions of the market or drops in the market can cause economic distortions that really are important to the Fed. But long-term investors should just ignore this stuff. You know, there's never been ever going back to 1802, a 20-year period where stocks haven't made a lot of money for people. Nobody ever lost money if they kept it in the market that long. And I think that's still going to be true going forward. And so what you need to do is put your stocks under the bed and forget about them because three or four years from now they'll be higher than they are today.
RAY SUAREZ: David Jones, are you as calm as Kevin Hassett about Monday?
DAVID JONES: Not quite. I do think we are certainly in the middle of a correction. I also accept the view that over long periods of time, the best returns are available to those who hold stocks. But we've come an awful long way in this stock market rally. We've come a long way against the background of extremely favorable economic fundamentals, strong output growth, very low unemployment, and very low inflation. And it looks like, at least on the inflation side, we are beginning to see a gradual increase, which, as I said earlier, could lead to somewhat higher interest rates. So, we may be in for a period of a perhaps somewhat longer correction. I do certainly accept the view over the long-term that the stock market is the place to be though.
RAY SUAREZ: Well, one big difference since 1987 is that there are far more individual investors than there were the last time there was a big downturn in the market. So it's not the program traders, the huge institutions making markets. It's a lot of little guys. Could their behavior be a lot more key on Monday morning?
DAVID JONES: Well, it could be critical in the short-term, depending on how they behave toward the market; whether or not they are worried about the jitters that we've seen. But also for Chairman Greenspan, it presents something of a dilemma because those individuals had been tying their spending fairly directly to the stock market, the appreciating stock market, and thus savings out of income have dropped to very low, even negligible, even negative levels. And so in a way, the Fed chairman would see the economy as somewhat overextended, particularly in terms of excessive demand growth. He's referred to that in recent policy statements. And I think that's a concern for his, so it may be that he's not too unhappy to see a short-term correction in the market. He's not trying to cause it. He's not trying to control the stock market. He's really trying to control the economy. But I think he has become concerned that the extreme optimism in the market is causing the economy to grow too fast.
RAY SUAREZ: Kevin Hassett, one thing about the recent reporting in the market seems to ignore is that there are tens of millions of Americans households with negligible or no exposure to the price of stocks, small amounts in personal retirement accounts or no ownership at all. How does this affect them?
KEVIN HASSETT: Well, you know, if you don't have your money in the stock market right now, then it still might affect you if it goes on to affect the overall economy. So if a decline in the market causes a recession, causes unemployment to go up, then folks who aren't in the market might still be damaged by it. But, you know, there's a flip side to that and that is that in 1982 the Dow Jones industrial Average stood at 777. Since then it's gone up by more than a factor of 13, even after the correction today. And you know, back in 1982, only about 10 percent of Americans owned stock. Now it's about 50 percent. And if that trend continues, I think that it will only be good for America because wouldn't the world be a better place today if everybody owned stock in '82 and everybody experienced that 13 fold increase? And I think one of the problems that I believe has kept people out of the market is that there have been so many people who are so concerned about the short-term declines and so worried about them that they call for a stock market bubble that's going to burst any moment, that they scare ordinary folks out of the market. And David just agreed with me that if you're in for the long-term, then you should be exposed to equities. In fact, it's dangerous not to have equities because they might go up by so much more than everything else. And so I would hope that our listeners wouldn't be scared away from the market because it might well go down on Monday, because it might well go down on Monday. But the long history of stocks is that they go up and up and up and they outperform other investments. And I think almost every analyst believes that that's going to be true in the next 20 years or so.
RAY SUAREZ: Kevin Hassett, David Jones, thanks a lot.