Wall Street Apt to Stay Bullish in Spite of Riots
The nation’s second-largest city went up in flames, but on Wall Street it was pretty much business as usual.
Though investment pros admit that the social breakdown exposed by the Los Angeles riots raises major questions about the U.S. economy and financial markets in the long term, for now those concerns are like smoke on the far horizon: Worrisome, but not close enough to make a difference to most investors.
Indeed, many analysts predict that Wall Street will continue to ignore the Los Angeles disaster and related strife in other cities, simply because there is no sign that the economic recovery will be derailed in the short run.
Unless an external event affects corporate earnings or market interest rates, “the markets have the toughest skin of any animal alive,” says A. C. Moore, investment strategist with Argus Investment Management in Santa Barbara.
The Dow Jones industrial average rose 25.94 points on Thursday, even as Los Angeles burned and riots broke out in Atlanta, San Francisco and other cities.
On Friday, the Dow lost 23.03 points to close at 3,336.09, but that was largely a factor of slow trading as many New Yorkers went home early, fearing disturbances in that city.
For the week, the Dow inched up 11.63 points. The broader market showed more strength, with the NASDAQ composite index of smaller stocks rising almost 1% to 578.14.
No matter how anxious investors nationwide might have felt as images of Los Angeles afire dominated TV news, underlying optimism about the economy remained intact, analysts say:
* Last Thursday, the government said its index of leading economic indicators advanced again in March, for a third straight month. Also, new applications for unemployment benefits in late-April remained at their lowest level in six months. “The gauges are still positive,” notes Moore.
* Investors have been pleasantly surprised as many companies have reported better-than-expected first-quarter earnings. Those numbers have whetted Wall Street’s appetite and suggested to many investors that there is good reason to hang on to stocks.
* Though California’s economy represents one-sixth to one-eighth of the entire U.S. economy, at this point investors don’t believe that a further slowing of the Golden State economy--as the Los Angeles area still reels--could by itself tip the nation back into recession.
In the rest of the nation, “commerce goes on,” says Richard Strong, head of Strong mutual funds in Milwaukee. “Some farmer out in Iowa, he’s planting his field today,” even as the embers cool in the Southland.
Still, some veteran money managers admit a feeling of unease about the massive destruction in the Los Angeles area.
Are many stocks worth their current high prices, some pros ask, if fear and despair in America increase in the 1990s--holding back investment, restraining income growth and consumption, and thus limiting economic growth?
To Bradlee Perry, chairman of the Babson mutual funds in Boston, the Los Angeles crisis calls into question America’s ability to make the most of its resources in the battle to compete economically with other nations worldwide in the ‘90s.
“In the modern society, human capital is as important as machinery,” Perry says. “Yet we have a large number of people in our society who aren’t really equipped to function in a market economy. It’s a wasted asset.”
While the stock market will deal with that issue over the long term, some experts warn that not all ramifications of the civil unrest are necessarily in the distant future. In the short run, there could be significant pressure on Uncle Sam to finance (or financially guarantee) new development programs in the nation’s inner cities.
With the federal budget deficit already expected to hit a record $400 billion in this fiscal year, calls for greater federal spending could quickly unnerve an already skittish bond market, and send interest rates soaring. If that were to happen, the stock market would stand little chance of holding at current levels, most pros admit.
But for now, Wall Street is convinced that Washington won’t suddenly open the money spigot any wider.
Whatever cash comes in to fix Los Angeles and other cities will have to come from elsewhere in the federal budget, or more likely from the area’s own resources, experts say.
“I don’t know what the solution is for social issues, but I don’t think it’s realistic to expect an increase in federal spending,” says Suresh Bhirud, an independent investment strategist on Wall Street. “And we’re not going to get tax increases,” he adds.
Briefly: It still isn’t clear how the billion-dollar damage bill from the riots might affect the credit ratings of Los Angeles city and county--and thus the standing of their municipal bonds. On Friday, credit-rating agency Moody’s Investors Service said it was monitoring the situation but had not moved to alter the city’s debt rating or place it on a credit watch. . . . Are smaller stocks finally bottoming? The NASDAQ composite index’s slight recovery last week was a start, though it wasn’t enough to erase most of the damage from early in April. For the month, the index lost 4.2%, after a 4.7% decline in March. Year-to-date, the NASDAQ is off 1.4%. Meanwhile, the April rally in blue chip stocks pushed the Standard & Poor’s 500 index up 2.2% for the month, after a 2.2% loss in March. Year-to-date the S&P; is off 1.1%.
