Online NewsHour: Tumultuous stocks

SHOCK STOCKS

MARCH 11, 1996
TRANSCRIPT

The stock market's tumultuous past two days have left investors wondering what happened and what the future holds. Paul Solman, of WGBH-Boston, talks with one expert.

PAUL SOLMAN: Friday, down 171 points, today, up 110. The end of one week and worries of a crash, the beginning of the next week, and it seems as if the bull market charges on. What's going on and what's the connection between Wall Street and Main Street? Well, for these and other questions, we turn to David Hale, chief economist of Kemper Financial Companies, an investment and insurance group. And, Mr. Hale, welcome. So it looks to most of us or many of us like wild swings or huge swings, big swings at least. Why the swings?
DAVID HALE, Kemper Financial Companies: Well, there's elements of both schizophrenia and hypochondria in the market right now. We had a month ago many investors believing the U.S. economy was heading into a period of recession or very slow growth, which would ensure that the Federal Fund's rate, the key money market yield in our financial markets, would fall from 5 1/2 percent down to maybe 4 1/2 or even 4 percent.
PAUL SOLMAN: That is--to see if I'm with you--the Federal Reserve would then lower interest rates.
MR. HALE: Yes.
PAUL SOLMAN: Because of a slow economy?
MR. HALE: That's right, to revive the economy.
PAUL SOLMAN: Right. Okay.
MR. HALE: The data over the last month has been very mixed. We had clear evidence of weakness in the industrial sector, but we also had evidence that retail sales was [were] beginning to recover after a poor Christmas and a very depressed January because of severe weather and also the government shutdown. But yesterday's numbers suggested the economy might be entering a boom. We had employment growth twice as high.
PAUL SOLMAN: Not yesterday. You mean on Friday.
MR. HALE: On Friday.
PAUL SOLMAN: Right. Okay.
MR. HALE: Twice as high as most economists expected. Now there's explanations for this. Because of the government shutdown, we've had distortions in the survey week; in addition because of the government shutdown and the severe winter weather in January, a lot of business was delayed, and the major source of employment growth last month was temporary help agencies. There were gains in construction, gains in manufacturing, but temporary help agencies boomed.
PAUL SOLMAN: So that means it wasn't amazing as it might have seemed.
MR. HALE: I think with the advantage of hindsight after the weekend, the market reflected and decided these numbers were so extreme that we should be discounted somewhat.
PAUL SOLMAN: Now, so but do you mean that interest rates are the sole determinant or the major determinant of these swings up and down in the stock market?
MR. HALE: No. The market's a function of earnings growth and interest rates, and what we've had over the last year has been reasonably good growth in corporate profits and modest gradual Fed easing. The market might have had a correction for a few weeks and still rallied later in the Spring because the market began to focus on profits again, but in recent weeks, we've had bond yields in the United States rise by almost 100 basis points.
PAUL SOLMAN: That means that it costs more money to borrow--
MR. HALE: That's correct. The interest rate on long-term government bonds got down to about 5 3/4 percent in early January, hoping for a deficit reduction breakthrough, a slow economy, lower foreign rates, but over the course of January, February, those hopes were disappointed, and then last week, we had a further shattering of those hopes in the markets because of the strong employment number.
PAUL SOLMAN: Is this how the market always moves? I mean, it's either earnings or it's interest rates, is that it?
MR. HALE: Well, those are the two primary determinants of stock market value over time, but from day to day, week to week, you can have policy events. This news in China tonight could be threatening to the market tomorrow, depending on what happens, concern about the primaries and what it might do to trade policy, but over time, the market historically is heavy influenced by the interaction of profit and interest rates.
PAUL SOLMAN: Okay. Now, here's a question. Do swings like this matter, or is this something that the news media in our infinite wisdom blow out of proportion time and again?
MR. HALE: Well, it matters in the sense that one in three Americans now owns a mutual fund. We now--
PAUL SOLMAN: Owns a share--
MR. HALE: Owns a share of stock in a mutual fund. Thirty million Americans own equity directly, and the value of the stock market has a big influence on the cost of capital from business. So if this turns into a trend, where the market becomes strong or weak over a period of several days or several weeks, it would influence the economy. But one- and two-day volatility, we've been accustomed to that.
PAUL SOLMAN: How does it influence the economy, I mean, just people feel richer, I get that, because if lots of people are invested--
MR. HALE: If we have a sustained movement in the market over a few months, with prices rising or falling by say 10 or 20 percent, that would affect consumer perceptions of wealth. It would affect the business cost of capital.
PAUL SOLMAN: So what would consumer--then people would spend more money, you mean?
MR. HALE: Well, last year, even though we had sluggish growth in employment and income, we did have benefits for the economy from rising share prices. Some consumers spent more than they earned because they had stock market gains.
PAUL SOLMAN: But does it matter if it's 170 up and 110 down? I mean--
MR. HALE: Day-to-day volatility has no significant impact on the economy. This would have mattered on Friday. If it would have been confirmed by further weakness on Monday, then you would have had discussion about maybe we're in a more protracted consolidation.
PAUL SOLMAN: One thing you hear a lot of talk about is the disconnect between the economy and the market, i.e., we hear good news in the economy, jobs are created, then the market goes down. AT&T lays people off, AT&T's stock goes up. What's going on? Is there a disconnect, and, if so, is that the first time this has happened?
MR. HALE: No, no, there's very much a connect. But what's different are the time lags involved. Right now, the stock market is focusing on where the U.S. economy will be in six months or nine months. And basically, the market a month ago was discounting further monetary easing to revive the economy later this year and certainly in 1997. Now, suddenly the market has to confront the risk that interest rates are going to stall or might even go back up again at some point. That changes the timing of things. Day to day we have swings in sentiment in response to many factors, election news, foreign policy news, a surprise economic number, but over time, the market does correlate with the economy and does influence the economy, but day to day, we can all have mood swings, and the financial markets aren't any different because they're a reflection of human behavior.
PAUL SOLMAN: So the disconnect is a short-term phenomenon?
MR. HALE: Yes.
PAUL SOLMAN: But overall, you say the stock market goes up, that means the economy is doing well.
MR. HALE: That's right.
PAUL SOLMAN: All else equal.
MR. HALE: Over a period of six months to a year, there is a very strong correlation between the stock market and the economy, with the only caveat being the stock market is always looking forward six months. So the strength of the stock market is telling us a lot in the last few months about the economic outlook for later this year.
PAUL SOLMAN: Well, we'll see if you're right. Thank you very much for joining us.
MR. HALE: Okay.

Program
Support
From: