Key Markets Plunge Amid Growing Economic Gloom : Stocks: Japanese and Mexican indexes fall sharply. Dow is also off. Analysts suggest lower interest rates.
Despite signs of continuing growth, a deepening gloom about the economy has triggered sharp declines in some key world stock markets, and many experts fear that the slide will continue.
The Japanese market hit a 5 1/2-year low Wednesday and fell another 258.02 points, or 1.6%, in morning trading today. Mexico City stocks suffered their biggest one-day decline since 1987 on Wednesday. In the United States, the drop in stock prices was more muted but nonetheless unnerving, as the Dow Jones industrial average fell 41.73 points to 3,287.76.
“It’s a nasty, negative environment,” warned Alan Ackerman, analyst at brokerage Reich & Co. in New York.
Ackerman and others note that market developments might just force the world’s central banks, including the Federal Reserve, to cut interest rates again, a tool that has been used repeatedly during the past year to nudge the U.S. economy back on track--boosting stock prices in the process.
Many economists believe that the Fed would rather not cut rates further. But left unchecked, investors’ growing pessimism about the economy threatens to become a self-fulfilling prophecy.
In North America, the sudden weakness of stocks is attributed as well to the rising popularity of likely presidential candidate Ross Perot.
On Wall Street, Perot is less feared for his specific stance on key issues than for the general feeling that his ascendance implies massive changes ahead for the American social and economic systems. Unable to quantify those changes, however, uncertain investors are simply pulling away from the stock market in fear.
“The rationale for his candidacy is more clearly perceived now--that people are just dismayed at how the two traditional parties are bogged down in the old politics,” money manager Charles Albers in New York said.
But, although Perot is a catalyst for some of the selling, stock traders say the markets’ greatest concern is the nagging fear--as yet largely anecdotal--of another global economic slump.
In the United States, the Dow index’s 41.73-point loss Wednesday followed a 25.41-point drop Tuesday. From its peak of 3,413.21 on June 1, the Dow has fallen 3.6%.
More worrisome are the painful declines of many small-company stocks whose fortunes are tied almost exclusively to the domestic economy. The NASDAQ index of 4,000 smaller issues, for example, has lost 6% of its value since June 1.
Though most economic signals in recent months have indicated that the U.S. economy continues to expand, many experts believe the pace is slowing. Parallels are being drawn to the spring recovery that followed the Gulf War in 1991; by last summer, recessionary signals were flaring again.
“You can make a case that it’s looking like last year,” said Michael Sherman, investment strategist at Shearson Lehman Bros. in New York.
Analysts note that the latest consumer confidence polls suggest that Americans retain a disturbingly pessimistic view of the economy’s long-term prospects. Rather than spend money, many Americans are paying off debts at a record pace. “I think there’s a deep fear of unemployment recurring,” Ackerman said.
In such an environment, Wall Street fears that consumer spending will continue to wane, pulling the economy down and dashing hopes for higher corporate profits--which the stock market badly needs to justify the sharp gains in share prices last year and earlier this year.
That possibility is spooking U.S. investors because weak corporate profits are at the heart of the Japanese market’s continuing slump. The Tokyo Stock Exchange’s Nikkei index fell 507.73 points, or 3%, Wednesday to 16,445.8 points, the lowest since October, 1986. After morning trading today the Nikkei index stood at 16,187.78. Investors see little chance for accelerating economic growth in Japan this year, as the country continues to reel from the bursting of its real estate bubble.
Mexican stocks also are suffering from worries about slower economic growth. Interest rates in Mexico have risen this year, and investors expect that, if the U.S. economy slows further, Mexican exports to the United States also will decline.
But the Mexican market’s worst fear is that the proposed free-trade agreement between the United States and Mexico will not become a reality, potentially turning back the clock on Mexico’s economic revival.
Perot’s attacks on the trade pact in recent weeks--he says he fears that the agreement would cost too many U.S. jobs--suddenly hit home with Mexican and foreign investors Monday, causing a 67.34-point plunge in the Mexico City exchange’s key Bolsa index.
Tuesday, the Bolsa fell another 49.6 points, and Wednesday sellers swamped the market, driving the index down a stunning 99.65 points to 1,593.29. The three-day loss amounted to 12% of the market’s value.
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