MIDEAST CRISIS HITS HOME : The Fear Factor : Market’s Orderly Decline May Create False Sense of Security
Amid the stock market’s continuing slide, many Wall Streeters are expressing satisfaction with the “circuit breakers” that seem to be slowing the decline.
But that’s raising a difficult question: Would it be better just to let the market find its own level--as quickly as possible--rather than artificially stretch out the plunge?
Noting a lack of panic in the market, despite the severity of stocks’ losses so far, some analysts fear that institutional investors are lulling themselves into a false sense of security. True panic selling, unencumbered by circuit breakers, might finally wash out the fear in the market and allow it to stabilize at levels that reflect the new economic reality, some argue.
“One argument against circuit breakers is that maybe prices should be lower, and you want to get there quickly,” says Tyler Cowen, associate professor of economics at George Mason University’s Center for the Study of Market Processes in Fairfax, Va.
He also notes that circuit breakers could artificially create a panic selling situation: As stocks fall near a level that would trigger a circuit breaker, investors may begin dumping for fear that they won’t be able to sell later.
So far, circuit breakers on the New York Stock Exchange and on the Chicago Mercantile Exchange, where stock index futures are traded, have achieved the desired effect, those exchanges say:
* On the NYSE, index arbitrage program trading has been all but suspended after the Dow Jones industrial index has fallen 50 points. That has removed considerable selling pressure, even though the Dow has gone on to close down 54.95 points last Friday and 93.31 points on Monday. NYSE Vice President Richard Torrenzano on Monday called the circuit breaker “very effective.”
* On the Chicago Merc, a circuit breaker that halts selling when the Standard & Poor’s 500-stock index futures contract falls 12 points seems to have braked selling across both futures and stock markets. After dropping the 12-point limit Monday, selling at a lower price was banned for 30 minutes. In the interim, buyers surfaced and the contract rebounded by midday, though it fell again by the close.
Besides their use in program trading, S&P; futures often are used as a proxy for actual stocks, when traders simply want to bet on a market decline. Either way, futures--and futures circuit breakers--can set the tone for the stock market. Thus, analysts say it isn’t a coincidence that the Dow seemed to hold just above the minus-100 level for much of Monday: The 12-point S&P; circuit breaker is the equivalent of about a 100-point fall in the Dow, around 3.5%.
Yet many experts agree that stock prices are likely to drop much lower in the near term, given the potential for a U.S.-Iraq war and for a global economic recession as oil prices jump. In many nations without market circuit breakers, stocks suffered far greater declines Monday than in the United States.
Would it be better just to allow the selling to reach a crescendo--like the 508-point, 22.6% plunge in the Dow on Oct. 19, 1987, before circuit breakers were introduced--than to prop up stocks artificially?
California State Treasurer Thomas Hayes, who sat on the blue-ribbon NYSE panel that studied market volatility after the 1987 crash, says the benefit of circuit breakers is simply that “they give people time to think.”
Hayes says he didn’t support the concept of circuit breakers initially. “I took some real convincing, because I consider myself a free marketeer,” he says. But talks with investors who lived through the 1987 crash swayed him.
Investors felt that events happened far too fast to allow any rational decision-making in the 1987 crash, Hayes says. Circuit breakers at least provide some breathing room. Yet such limits don’t interfere with the long-term market process, because “eventually the market will find its own level,” Hayes says.
Glenn Cutler, editor of the Market Mania newsletter in Pacifica, agrees that a daily Dow drop of 80 to 90 points is preferable to a sudden 500-point loss. “It at least gives investors the opportunity to review the situation daily.”
But Cutler also admits that the circuit breakers that restrain blue-chip selling are misleading because “they only limit the area that is the emotional trigger,” meaning the Dow stocks.
By limiting the damage in those visible stocks, more money managers may be encouraged to remain complacent about the market decline. Meanwhile, the rest of the market is suffering far worse. Monday, for example, while the S&P; 500 index lost 3.0%, the NASDAQ over-the-counter composite suffered a 4.2% hit.
Frank Baxter, president of Jefferies & Co., a Los Angeles brokerage that specializes in institutional trading, says that while many investors may be heartened by the market’s seemingly orderly decline, “there really hasn’t been any buying support.”
GLOBAL STOCK PLUNGE
How key stock indexes tumbled worldwide Monday as concerns mounted over the Iraq situation.
Monday Point Percent Country/stock index close drop drop South Korea/Composite 661.40 -10.02 -1.5% Australia/All Ordinaries 1,548.30 -41.30 -2.6% U.K./FTSE 100 2,220.20 -64.40 -2.8% Japan/Nikkei 28,559.53 -916.23 -3.1% U.S./Dow industrials 2,716.34 -93.31 -3.3% France/CAC 40 1,773.79 -95.66 -5.1% Germany/DAX 30 1,740.93 -99.91 -5.4% Singapore/All-Singapore 403.13 -27.17 -6.8% Hong Kong/Hang Seng 3,107.98 -248.97 -7.4%
THE DOW’S ROCKY SLIDE
The Dow Jones industrial index has tumbled more than 183 points in the last three sessions. Wednesday close: 2,899.26 Monday close: 2,716.34, down 93.31
