UPS & DOWNS
JULY 16, 1996
Elizabeth Farnsworth is joined by Susan Kuhn of Fortune Magazine to discuss what Wall Street's latest roller coaster ride means for the economy.
ELIZABETH FARNSWORTH: Is one of the great stock market runs in history coming to an end? That's the question for Wall Street and for many on Main Street after recent large drops in the market, including yesterday's Dow Jones loss of 161 points. Today saw wild swings, with the Dow rising more than 45 points early, then falling more than 167 points during the afternoon, and coming all the way back up 50 points before closing up 9 1/4 points. What's going on? To help us understand, we're joined by Susan Kuhn of Fortune Magazine. Thanks for being with us, Susan.
SUSAN KUHN, Fortune Magazine: (New York) You're welcome, Elizabeth.
MS. FARNSWORTH: Why the wild swings today, what was going on?
MS. KUHN: Well, Wall Street is having another one of its fun days this summer. Basically the market hasn't been doing very well in both June and July. This comes after a long spectacular run, so I think it's catching many people by surprise.
MS. FARNSWORTH: So today was--it was something of a correction over yesterday, but it, it's been dropping so much. Why?
MS. KUHN: Well, I think there's a lot of concerns. The first is we really haven't had a break in the market. It's been going straight up, and you have to wonder, boy, when are people going to start to get nervous, when are they going to take a break? The cause for this one appears to be corporate earnings. Many companies have been reporting earnings for the second quarter that are not matching investor expectation. That seems to be the excuse for people to sell. I was talking to people at Fidelity Investments today, and they're finding that the volume of calls from individuals and stock funds was up 30 percent over the past few weeks. So clearly many individuals who may be in stocks for a variety of reasons are starting to get nervous.
MS. FARNSWORTH: And this has been particularly true though. The decline has been particularly marked in technology, high technology stocks, computer companies, that sort of thing, is that right?
MS. KUHN: That's true. And technology, Elizabeth, really has been the story of the 90's. All of us can see we're getting new computers shipped to our desks. Our children are learning how to play computer games, and if we don't know how to surf the Internet, we sure feel guilty about not knowing it. Wall Street hasn't missed that story. In fact, it likes a good story, so it's been bidding technology stocks up. But, of course, what goes up--what must come down, and that's what we've really been seeing in, in the last couple of weeks. Technology has been taking it pretty hard.
MS. FARNSWORTH: It used to be that General Motors or some other Blue Chip was the indicator, but I noticed a company called Allied Materials had some bad sales and that sort of started this, or at least it was a factor in all this, is that right?
MS. KUHN: Well, you could point to a single company. You could point to a couple of companies. Texas Instruments, for example, also reported weaker than expected earnings. But the big story, the whole sector seems to be disappointing people, though there are individual companies that are doing well. Many of these stocks were pretty richly priced, and they didn't necessarily deserve to sell so high and now they're selling off.
MS. FARNSWORTH: Well, looking at the whole situation, here's the big question, is this a correction, or are we looking at the beginning of a bear market, a major decline over the next years?
MS. KUHN: Well, if you can tell me, then we'll both make a lot of money.
MS. FARNSWORTH: (laughing) What are the analysts saying I'm saying?
MS. KUHN: There's a fair amount of debate and there always will be, because that's actually the whole joy of the stock market. We really never know what's going to happen to it next. I think that for individuals we have to take a step back. It's really a gamble to say will stocks be up tomorrow, or will they be down, and the question we all have to ask ourselves is how long can we be invested in the markets, when do we need money? If it's a 10-year horizon or even longer, then we certainly can save in stocks and ride out these daily movements up and down. But if we need to make a bet in a year, if say we want to buy a house 12 months from now, it may not be wise to make a bet on stocks, because as you've seen today, they can really go down. There's no reason they have to continue to go up.
MS. FARNSWORTH: And this really does affect more ordinary Americans than ever before, doesn't it, because for various reasons more people, whether they know it or not, are involved in the stock market through their pension plans or through one thing or the other.
MS. KUHN: That's true. The key word here is retirement. I think all of us get a little bit nervous, will we have enough money to retire on. We can't count on our companies anymore. We can't count on the government anymore. So as a result, more and more of us are saving on our own, and we're investing in stocks through 401K plans. That means we do have exposure to the stock market, whether we like it or not.
MS. FARNSWORTH: And, in fact, I've read in some articles that one reason for the high rise has been the number of baby boomers, the high rise in stock prices, entering the market in recent years. Now are we seeing a correction in that?
MS. KUHN: We are right on target. The story of the 1990's in the stock market has been individuals investing in stock funds. They've been the primary buyers of stocks, bigger than institutions and pension funds and insurance companies, you can go on and on with the list. The question is most of us appear to need to save more money so the idea is that we'll continue to invest in stocks for years to come. That's the bullish case. That's the reason why stocks have been going up, and it certainly could continue to go up. The only question is when people stop investing in stocks and start withdrawing money at some point we'll reach 50's or 60's and we might need some income, in which case we could be selling stocks instead of buying them, and that would be bad news.
MS. FARNSWORTH: Do you think, though, or do the analysts say that this upward movement which has been going on for, what, six years, with just no, no drop bigger than 10 percent, am I right about that--
MS. KUHN: Right.
MS. FARNSWORTH: --which is historic.
MS. KUHN: Since 1990, it's been pretty much--
MS. FARNSWORTH: Yeah.
MS. KUHN: --straight up. But you could even go back to 1982. That's really the beginning of this long rising stock market.
MS. FARNSWORTH: And do you believe that it just had to stop at some point, at least temporarily or, or are the analysts saying--I mean, is that what analysts are saying--this was inevitable basically?
MS. KUHN: A lot of people were expecting the market to fall this summer. I think that's what you're getting at here. And it, it sort of is inevitable that stocks go up and they go down. The question is how far are they going to go down, but tomorrow will be another down day. I mean, today turned out to be positive. There's a couple of benchmarks you can take a look at. If the market falls less than 5 percent, people tend to call that a dip. It's just a down day. The market's going--continues to rise. If it falls 5 to 15 percent, people like to call that a correction, which is just a fancy word for saying the market really fell here. If stocks fall more than 15 percent, then you may have heard the term “bear market.” That's a pretty prolonged or deep downturn. That's the kind of risk that people are a little bit afraid of. That may be happening right now. It may not happen for five or ten years, but you can make a bet that with stocks going up in the 80's and so far in the 90's sometime after the turn of the century, if not before, we really could have a severe downturn in the market.
MS. FARNSWORTH: Well, Susan Kuhn, thank you very much.
MS. KUHN: You're welcome.