THE COLLAPSE ON WALL STREET - Dow’s Big Plunge Isn’t a Signal That Recession Is at Hand, Analysts Say - Economy: Worries about junk bonds and earnings helped fuel selloff fever.
The dramatic 190-point plunge in the stock market Friday was mainly brought on by financial worries and did not signal investor concern about the economy or the onset of a recession, economists and business analysts said.
Although analysts said Friday’s selloff could spark a further “adjustment” in the stock market during the next few days--as well as some “psychological spillover” in other financial markets--there was widespread agreement that the economy would emerge essentially unscathed.
“As far as economic spillover goes, I don’t see a lot of it,” said William C. Melton, chief economist for IDS Financial Services in Minneapolis. Stephen H. Axilrod of Nikko Securities Co. in New York agreed. “I don’t think it’s going to have any effect,” he said.
To support their view, economists pointed out that the huge stock market collapse of October, 1987, did not inflict lasting damage on the economy, despite predictions to the contrary. Manufacturers continued to enjoy a boom, despite the severe jitters that shook the financial world.
And unlike two years ago, a time of widespread nervousness about inflation and recession, Friday’s collapse came at a time of relative calm in the U.S. economy, with business executives and investors resigned to a period of sluggish growth and modest inflation.
Bush Administration officials expressed confidence that the impact would be minimal. Treasury Secretary Nicholas F. Brady, who briefed President Bush and other top officials on the slide late Friday afternoon, issued a statement predicting that there would be little, if any, economic impact.
“Today’s stock market decline doesn’t signal any fundamental change in the condition of the economy,” Brady asserted. “The economy remains well balanced and the outlook is for continued moderate growth.” The Federal Reserve had no formal statement on the slide.
Deputy White House Press Secretary Alixe Glen said the Administration was not contemplating any special measures as a result of the decline. She said authorities had no plans to try to close--or delay the opening of--the stock market on Monday.
Economists speculated that if the decline in the stock market continues, it could prompt the Federal Reserve Board to nudge interest rates down slightly to help contain any damage. But they differed about how long it would have to continue for the Fed to react.
David Wyss, an economist at DRI-McGraw Hill in Lexington, Mass., said the Fed “will have to” loosen “if this continues” and corporations begin finding it difficult to attract necessary financing. “But only if it continues,” he added.
But A. Gary Shilling, a Wall Street economist, predicted that “the Fed may be reluctant to react this time” for fear of exacerbating inflation pressures. Shilling noted that Friday’s news of an 0.9-percentage-point rise in producer prices helped trigger the stock-price decline.
Analysts also were quick to point out that there are some significant differences between Friday’s slide and the 508-point plunge that the stock market took Oct. 19, 1987--the day of the now-famous “Black Monday” crash.
Among others, Stephen S. Roach, senior economist at Morgan Stanley & Co. in New York, noted that the economy is not overheating, as it appeared to be in 1987; stock prices are not nearly as bloated; interest rates are not rising sharply, and the dollar is not under constraints.
“There is no comparison between the financial market conditions of today and (those of) two years ago,” Roach declared.
Along with economists from other investment advisory firms, David D. Hale, economist for Kemper Financial Services of Chicago, thought the slide might prove to have a silver lining--at least for those investors who are seeking out bargains.
“I think it could be a buying opportunity,” Hale said.
Melton’s IDS Financial Services agreed. The Minneapolis-based firm sent telexes to its clients late Friday advising that “we are going to have an opportunity to enter the market again as buyers” as soon as the current “correction” is over.
To be sure, not everyone was sanguine about the likely impact of Friday’s slide. Norman E. Mains, chief economist at Bateman Eichler, Hill Richards Inc. in Los Angeles, said he believes that “stocks are a good predictor of recession” and Friday’s decline suggests output will be “weak.”
“We may be in for a mild recession,” he warned, stopping short of an actual prediction.
Analysts seemed to agree that the stock market slide stemmed almost entirely from financial factors. They sketched this scenario:
- Corporate earnings have been disappointing for several quarters now, but the markets had ignored that because investors were distracted by leveraged buyouts and takeovers, frequently financed by high-risk junk bonds.
- Then, Friday’s reluctance by the banks to underwrite the United Air Lines buyout deal signaled that the takeover spree could be over and that financing would be more difficult to obtain in coming months. The markets panicked, and stock prices began to plummet.
“The underlying fragility of the financial aspects” was exposed, Axilrod said.
- In addition, the government reported Friday that wholesale prices rose sharply in September, raising some inflation concerns, but most analysts considered the rise to be temporary.
Whatever individual investors may have thought, economists tended to view Friday’s decline as a needed--and probably very healthy--”technical correction” that might very well help the economy keep its momentum up.
Robert H. Chandross, chief North American economist for Lloyds Bank, said that although economic output is growing more slowly now than it was a few months ago, “that’s desirable and necessary” to keep inflation pressures from intensifying.
“I don’t think there are any economics that can explain what happened today,” he said.
Art Pine reported from Washington and Jonathan Peterson from Los Angeles.
