Wall Street’s Wild Week

TERENCE SMITH:

It's been another week of volatility on Wall Street. Monday and Tuesday, the Dow Jones industrial average dropped more than 300 points, only to move up nearly 500 points Wednesday, then holding its ground and ending with a gain for the week. The equally volatile tech-heavy NASDAQ was down 57 points for the week.

Joining me now is Gretchen Morgenson, financial writer and columnist for The New York Times. Gretchen, welcome.

GRETCHEN MORGENSON:

Thank you.

TERENCE SMITH:

Looking back at this extraordinary week, what explained the ups, the very sharp ups and downs?

GRETCHEN MORGENSON:

Well, we've had increasing volatility in the markets really for the past few years. It's gotten much worse this year. The explanation for it really is just tremendous investor uncertainty. And, of course, we're all living through a down market. And that makes it much harder to take. People didn't seem to mind the volatility when stocks were going up, but now that they're going down it's very, very difficult. You had a lot of outflows from mutual funds this week which accounts for some of the down days. But you also seemed to have some stabilization in some of the bigger, broader indexes, not talking about the NASDAQ but in the S&P and the Dow Jones. So some professionals feel that we might be looking at a place where we can sort of bounce along here and get some stability.

TERENCE SMITH:

We also had some dramatic headlines this week, Gretchen. You had the Adelphia executives being taken off in handcuffs.

GRETCHEN MORGENSON:

Right.

TERENCE SMITH:

We had Congress agreeing on a compromise bill to alter the accounting industry.

GRETCHEN MORGENSON:

Uh-huh.

TERENCE SMITH:

Did those developments move the market?

GRETCHEN MORGENSON:

Oh, definitely. I think investors are looking for some sign that we are attacking the problem, solving the problem, at least getting to a point where we will get to a new ground where corporate financials can be trusted, where corporate chiefs can be trusted to either tell investors what's going on in their books and their operations. I think that's what some of those activities mentioned this week really started to give investors hope for.

However, on the negative side, I think it's important to point out that the bank stocks, the big, you know, trusted bank stocks like Citigroup and J.P. Morgan were really hurt this week in the investor trust department by the Congressional hearings into their role in the Enron fiasco. And I think that's going to have longer-term ramifications both for those companies and for the market overall.

TERENCE SMITH:

What… Gretchen, what do you attribute that very sharp midweek spike when it went up 488 points in one day, the Dow Jones — what do you think caused that?

GRETCHEN MORGENSON:

Well, we have had a tremendous downward pressure and so there is always that need for investors to look for the bottom. I think that there were a lot of people who had bet against the market who were probably unwinding their positions, their negative positions and therefore buying stocks. But I do think that there is still this, you know, sort of a need for investors to be positive. And they're looking for any entry point. That was seen obviously on Wednesday.

TERENCE SMITH:

Of course, still more blues for the technology sector.

GRETCHEN MORGENSON:

Yes. It's important to note that the technology sector, although it did rebound a bit, is still very overpriced. Those shares… some of them may never come back. And I think investors are still into denial about that because, of course, technology gave them such enormous gains in the 1998- 99, 2000 era. So it's hard to sort of, you know, jettison altogether the companies that really brought investors a lot of gains.

TERENCE SMITH:

Still overpriced even though they have dropped, you know, NASDAQ has dropped 80% from its high?

GRETCHEN MORGENSON:

Well, that's one of the things that some professionals told me in my conversations with them that was rational about the market that they liked. And that is that this is an area where the economy is still weak. We are not seeing corporations go back and capital expenditures rising in technology. We are not seeing individuals rush to their stores to buy PC's. So it is a rational exercise for investors to avoid these shares. We just haven't seen the bottom in them, and the demand is not there, you know, for their goods. So you should not be buying these stocks here.

TERENCE SMITH:

You have been rational, but of course it was emotional as well. What was the mood? I mean you're there. You're covering this every day. What was the mood on Wall Street this week?

GRETCHEN MORGENSON:

Well, certainly the big up day was one of great euphoria. We've maybe finally seen the bottom. Of course, picking tops and bottoms is an impossible task and nobody should even try to do it. But any time you see 500 points almost move on the Dow, everybody will be happy with that. I think though the outflows and the mutual funds is a harbinger of continued weakness. I think that you're going to see a lot more movement into the money market funds, which are a safe haven. I think investors are still sorting through the carnage, you know, their denial has been pretty strong. They haven't been opening their statements is a common answer I get from investors. So I think there's still a little bit of negativity to work through.

TERENCE SMITH:

I have read analysts saying that investors are actually obsessed with the market itself rather than the economy, and that they're making their decisions based on their alarms about the market.

GRETCHEN MORGENSON:

Well, unfortunately the market became a very big part of the economy. As more and more investors invested in stocks, as more households had stocks, you had this stock market sort of wagging the dog, as it were. And you know, their sense that the market is a driver is absolutely accurate because so much of the gains that we saw in the stock market in the late- '90s was translated into increased consumer purchases, increased corporate purchases, so it definitely does have an impact. But now unfortunately it's weighing on the economy because if consumers continue to take heavy losses, then their spending will be curtailed.

TERENCE SMITH:

You know, for years consumers have accepted the notion apparently that stocks are the place to be in the long run — that if you buy them and you hold them and you wait long enough, you'll make money. Is that notion being undercut?

GRETCHEN MORGENSON:

I think it's being undercut, but I think the people that are in the worst scenario right now are, as you point out, people who don't have any long run left. The retirees, the people who are getting towards retirement who felt that they had this nest egg that was going to be there for them — and unfortunately it's no longer there. I mean, I know people who are now going back to work who are in their 60s who had retired years ago and thought that they really had it made in the shade. Those are the people that are really being hurt by the carnage in the stock market.

TERENCE SMITH:

Okay. Gretchen Morgenson, thank you so much.

GRETCHEN MORGENSON:

Any time.