Greenspan Talk Sends Markets Into Nosedive
Stock prices worldwide fell sharply on Friday after Federal Reserve Board Chairman Alan Greenspan warned that “irrational exuberance” in financial markets could drive stock and bond prices to unrealistic levels and trigger a collapse.
The Dow Jones industrial average plunged 144 points in the first half an hour of trading before recovering to close down 55.16 points at 6381.94--a decline of less than 1%. But the Tokyo and London stock exchanges--trading hours ahead of their U.S. counterparts--suffered their worst one-day losses this year, and other foreign markets also plunged.
Even with the U.S. market recovering most of its losses, Greenspan’s remarks nonetheless reinforced a fear that stock prices--already up 21% this year on the Dow average--may have run up too far too quickly and should be due for a “correction.” Greenspan’s remarks also raised questions about what the central bank might do later this month when it meets to set the direction for interest rates.
Although Wall Street was somewhat calmed by a government report Friday that the economy had created a smaller-than-expected 118,000 jobs in November--thus reducing the likelihood that the Fed would raise interest rates to slow economic growth--some experts forecast more turmoil ahead for stock prices, as some investors conclude that the markets are overheated.
“The process could be a bit disorderly,” suggested Michael Metz, chief investment strategist for Oppenheimer & Co.
Greenspan, in part of a Thursday night speech at Washington’s American Enterprise Institute, appeared to be trying to prick what he sees as a speculative bubble in U.S. markets.
Rivers of money--part of it from baby boomers’ retirement accounts--have been flooding into the stock market at unheard-of levels this year, fueling a boom that has been far more euphoric than many feel is warranted by the economy’s relatively sluggish growth.
“How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” Greenspan asked in his speech.
That those comments came on page 14 of a rather dry 18-page speech exploring the central bank’s role through American history only emphasized how intently investors listen to the Fed chairman, who has the power to influence key interest rates.
“He’s the helmsman of the universe, and when he even looks in a different direction, people react,” Arthur D. Cashin Jr. of the Paine Webber brokerage said Friday.
Although Greenspan often masks his points, his words can produce unambiguous results. In October 1991, for example, he said the economy was growing “a good deal slower” than was typical at that stage of a recovery. The next day, blue-chip stocks soared on expectations of renewed interest rate cuts and yields on Treasury bonds fell after having risen earlier.
But the Fed’s power is limited by the market’s willingness to go along. As has been seen many times in recent years, even when the world’s largest central banks act in concert to push the dollar up or down in world markets, they always fail if the much-larger private sector is moving against them.
On the floor of the New York Stock Exchange Friday morning, there was a consensus that after the recent Bacchanalia--including a 20% surge in the Dow just since July--investors were ready for some sobering up.
“People have been saying, ‘Gee, we’re going to get a correction,’ and [Greenspan] gave them an excuse for it,” stock specialist Stephen R. Porpora said, keeping one eye on the overhead monitors blinking details of the sell-off.
Many analysts suggested, however, that stocks may be due for only a short-term adjustment, rather than a long-term bear market or steep crash.
James J. Maguire of Henderson Bros., a 47-year stock-market veteran, said: “The old saying applies, ‘It’s the only game in town.’ ” With inflation and interest rates “very much in check,” in Maguire’s opinion, investors will stay in the stock market for lack of attractive alternatives.
But Oppenheimer’s Metz suggested that investors could still sell stocks and go to safer cash-like investments such as Treasury bills or certificates of deposit. Metz said he believes that markets worldwide, particularly bond markets, have been pumped up with borrowed money.
Those highly indebted investors are betting that interest rates will keep going down, pushing bond prices up, but Metz said flatly: “We’ve already seen the low point in interest rates throughout the world.”
The question facing Wall Street now is whether Greenspan will follow up his warning by raising interest rates as a further shock to the markets.
Some said he may already have accomplished his goal.
“It’s appropriate to try to let air slowly out of the bubble,” said Jean-Marie Eveillard, manager of SoGen International Fund, a mutual fund with investments worldwide. “If his remarks are successful and reduce the hype and speculative activity, he may not have to raise rates.” Christopher C. Quick, who heads the stock-trading company JJC Specialist Corp., put it more bluntly: “Instead of raising interest rates, he is going to give speeches.”
Many individual investors, who have tended to not panic in the face of other recent stock sell-offs, on Friday said they would hang tight. Amateur investors have been told repeatedly to leave their money in stocks for the long term and ignore temporary drops in value, no matter how painful they might be.
“I knew there would be some corrections,” said Ariston Sarroca, a 50-year-old Los Angeles-area investor with more than $200,000 in mutual funds and individual stocks. “I will stay put even if there is a 30% drop. I have confidence in the economy.”
Ann McGovern, 65, said she has no intention of selling, though she is closely watching prices on the $5,000 she has in stocks such as the Walt Disney Co. McGovern said she recently read predictions of a market crash from Elaine Garzarelli, a stock analyst best known for forecasting the 1987 market crash.
“I just don’t believe her,” said McGovern. “Even if there is one, I would hold on to my stocks, in the hopes the market would just come back.”
At some of the nation’s largest mutual funds, phone lines were just slightly more active than usual Friday.
Brian Mattes, a principal with the Vanguard Group, the nation’s second-largest mutual fund company, said of the thousand calls received by Friday afternoon, only about 100 mentioned the market tumble. Most, he said, were concerned about capital gains distributions.
“When there is a market drop like this, we typically don’t hear from mutual fund investors until the next day,” said Mattes.
At market leader Fidelity Investments in Boston, spokesman Scott Beyerl said call volume was just slightly higher with calls from investors expressing market concern.
New York’s weather behaved like the stock market Friday, opening gray and wet with umbrella-ripping gusts of cold wind. Things brightened around noontime, when the sun broke through for a while, but at the end of the day banks of dark clouds had once again massed over Wall Street.
At the NYSE, Friday began with traders girding for a possible crash.
Minutes before the market opened at 9:30 a.m., a young electronics technician in a green smock hustled inside from a cigarette break on the wet sidewalk. “It’s going down!” he yelled jokingly.
Aware that foreign markets had fallen sharply in anticipation of a bad day on Wall Street, professional traders had created so much selling pressure that the NYSE activated the “sidecar”--a protective mechanism that slows down computerized program trading by forcing huge electronic trades to get in line behind retail orders.
Watching the monitors just before the opening bell, one trader growled into a phone: “If the buyers stage a boycott here, this could get ugly.”
But if there was a buying boycott, it was called off by 10 a.m. when the initial plunge had brought prices low enough that some traders saw bargains. Also, the unemployment report--which showed the jobless rate rising from 5.2% to 5.4%--a four-month high--helped bring down bond market interest rates, in turn cheering stock investors.
Times staff writer Debora Vrana in Los Angeles contributed to this story.
* UNEMPLOYMENT JUMPS: The jobless rate hit its highest level in four months. D1
* LOOKING AHEAD: Fed chairman was trying to resolve a dilemma. D1
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
When Greenspan Speaks
A few words from Alan Greenspan, chairman of the Federal Reserve, are enough to move financial markets around the world. Some excerpts from his record:
* July 1993: Greenspan tells Congress that “on balance, the news on inflation must be characterized as disappointing.”
Fallout: The Dow Jones industrial average loses 24 points and there is a selloff in bonds as traders fear the return of inflation with economic growth.
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* December 1991: “The upturn in business activity . . . has clearly faltered. . . . There is a deep seated [public] concern out there, which I must say to you I have not seen in my lifetime,” Greenspan tells Congress.
Fallout: The following day, interest rates on five-year Treasury notes sink to their lowest level in 15 years.
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* July 1990: Greenspan admits to Congress that skittish banks are keeping a tighter rein on credit than the Fed desires and suggests it may lower rates to bring down market interest rates.
Fallout: The Dow Jones industrial index leaps to a record high.
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* October 1987: In office less than three months, Greenspan remarks that he is not alarmed by a new report showing slightly higher inflation.
Fallout: Financial markets plunge, pushed by investors who fear that Greenspan won’t be as vigilant on inflation as his predecessor at the Fed, Paul A. Volcker.
Compiled by JACQUELYN CENACVEIRA and JOAN WOLFF / Los Angeles Times
