‘Correction’ a New Experience in Heady ‘90s
Monday’s U.S. stock market dive, vicious as it was, doesn’t by itself answer the question on most investors’ minds: Is this the end of the great 1990s bull market, and the beginning of a long period of weak or falling stock prices?
It could be, of course. Just as the market’s stunning rise in this decade was largely unexpected, no one can say for certain that U.S. stock prices haven’t crested, and now are set up for a prolonged period of poor performance.
But many Wall Street veterans say the reason that broad stock market declines feel so painful to many American investors is simply that the 1990s have seen so few such declines.
Historically, pullbacks in stock prices--either “corrections,” which shaved up to 15% from major indexes like the Dow Jones industrial average, or more destructive “bear markets,” usually defined as declines of more than 15% in those indexes--occurred with far greater frequency.
Indeed, they were a fact of life for investors in the 1950s and 1960s, decades that were considered quite good for stocks overall.
“It used to be almost every year we’d have at least a 15% intra-year decline” from the market’s high to its low, said Parker Hall, a veteran investor who is president of Lincoln Capital Management in Chicago.
Hence, despite the severity of the 6% to 7.5% declines in major American share indexes on Monday, many analysts say the market is merely experiencing--in hyper-speed--a typical, and long overdue, pullback that will ultimately prove healthy for stocks by wringing out excesses.
Without question, the current market decline is already the worst since the bear market of 1990, which followed Iraq’s invasion of Kuwait and sliced 21% off the Dow index between July and October of that year.
From its all-time high of 8,259.31 on Aug. 6, the blue-chip Dow has lost 13.3%.
Until now, the Dow index and other blue-chip market gauges have soared along in the 1990s without experiencing a decline of more than 10%--and even the declines that came close have been few and far between.
A pullback of nearly 10% occurred in 1994, for example, when the Federal Reserve Board began raising interest rates as the economy boomed.
Likewise, the Dow sank nearly 10% in an abrupt sell-off in the summer of 1996, and fell by a like amount in March and April of this year, the latter again triggered by the Fed as it raised short-term interest rates slightly.
But after each of those pullbacks, stocks quickly rebounded with renewed vigor as buyers swarmed again--including many individual investors, whose hunger for stocks in the 1990s, especially via mutual funds, has been a key force powering the bull market.
Is this time likely to turn out to be any different?
“We’re into a severe correction,” said William Dodge, principal at money-management firm Marvin & Palmer in Wilmington, Del. “But this is not the start of a bear market,” he argued.
By Dodge’s definition, a true bear market is a decline of more than 20% in stock indexes like the Dow and the Standard & Poor’s 500.
Despite the panic selling worldwide in recent days triggered by worries over Southeast Asia’s economic and market woes, Dodge and many other big investors believe there is little fundamentally wrong with the U.S. economy and stock market--other than that share prices had gotten ahead of themselves.
Most important, analysts who expect U.S. stocks’ pullback to run its course fairly quickly point to the fact that interest rates are declining. Long-term Treasury bond yields on Monday fell to 20-month lows, in part as some investors dumped stocks in favor of bonds.
Other than corporate earnings, no other market variable is as important in determining investors’ judgment of “fair” stock prices than interest rates, because stocks and fixed-income investments such as bonds compete directly with each other for investors’ dollars.
On Oct. 19, 1987, when stocks crashed as the Dow lost a record 22.6% of its value, long-term bond yields were soaring over 10%.
On Monday, the bellwether 30-year Treasury bond yield was at 6.12%, or nearly 40% below its 1987 level.
“We don’t have that convergence of rising interest rates” this time, Dodge said, and that is a key reason why he believes stocks’ values will stabilize soon.
Analysts point out other reasons why they believe that there is no overwhelming reason for Monday’s selling to snowball into a market decline of 30%, 40% or more--a bear market that would be the worst since 1987, when the Dow fell a total of 36% between late-August and mid-October, then took two years to recoup that loss.
Dennis Jarrett, analyst at Jarrett Investment Research in Westport, Conn., noted that the selling thus far in stocks’ slump has been concentrated in such blue-chip issues as Coca-Cola and Intel Corp.
That is logical, Jarrett and others say, because it had been precisely those stocks that had been carried highest in the euphoria of May, June and July. Relative to expected earnings per share in 1997--a classic yardstick of value--those blue chips had reached levels that left them extraordinarily overvalued, many money managers argued in July and August.
Thus, if investors feel most compelled to sell those stocks versus others in the market, that should be viewed as a healthy sign, Jarrett said, because it will deflate what had been the greatest “bubble” in the market.
By contrast, many smaller stocks, which only in recent months have come into vogue with investors after three years of badly lagging blue chips, have held up well, at least until Monday.
The Russell 2,000 index of small-company stocks now is off 9.7% from its recent record high, versus the Dow’s 13.3% drop.
“There is a possibility that the Dow is not indicative of the market overall,” Jarrett said--and that even if blue chips slide further, the rest of the market won’t fall as much.
Other market pros, however, say that the sudden hunger for traditionally more volatile smaller stocks in recent months may be viewed as a sign that investors were becoming much more willing to take risks--something that often occurs near market tops, with disastrous results.
“People have been speculating [in smaller stocks] like there was no end in sight,” argued George Constantine, analyst at Merrill Lynch & Co. in New York.
Perhaps most troubling, some experts suggest, is the possibility that the market’s plunge foretells economic trouble that won’t be evident for many months. That worry centers on fears that Asia’s turmoil will trigger a global economic slowdown--and price deflation--so severe that it will cripple U.S. companies’ still-robust earnings, effectively pulling the rug out from under stock prices even if interest rates continue to decline.
That possibility has been dubbed the “ice” scenario for the world economy. And even money managers like Dodge, who don’t expect that something so dire will occur, admit that it will become a much bigger topic of discussion as markets globally plummet and questions are raised about consumer and business confidence.
“In this environment, people who want to talk about ‘ice’ now have something to talk about,” he said.
Even though the American economy’s health mostly depends on domestic consumption rather than exports, the great fear is that American consumers--twice as many of which are investors in the stock market today as in 1987 (surveys suggest more than 4 in 10 Americans now invest)--will suddenly begin to clamp down on their spending because they feel poorer as their retirement savings plans and other stock accounts fall in value.
Robert Bissell, head of money management firm Wells Capital Management in Los Angeles, doesn’t buy the ice scenario. He expects U.S. stock prices to fall further but, sooner rather than later, Bissell said, “I think most people will come back and say, the fundamentals are still intact” for the bull market.
Those fundamentals include accommodative interest rates, continuing corporate earnings growth, a highly competitive U.S. economy, and 86 million aging baby boomers who have come to view stocks as something they must own for the long run to guarantee a decent retirement, analysts say.
Likewise, Peter Canelo, investment strategist at brokerage Morgan Stanley, Dean Witter in New York, argues that stocks’ decline in the United States now is “out of the realm of the fundamentals, and into the realm of technical and panic selling.”
His view is that “we’re near the end of the panic sell-off,” and that the current decline, although the worst in the 1990s, doesn’t portend a deeper bear-market slide.
The danger, however, is that for whatever reason, the buying that Bissell and others expect to occur soon--as it has after every other significant market pullback in the 1990s--won’t occur.
Or, worse, that millions of individual investors will start to do something they have so far in the 1990s never felt compelled to do: Begin trimming their fund holdings, reducing their exposure to stocks.
Even Bissell admitted Monday that his firm, which manages $38 billion, was in no hurry to step up and buy.
The market’s decline “isn’t deep enough yet to bring out the buy side,” Bissell said. But “a couple of days of this, and you’ll have some bargains in this market for sure.”
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Some of the Biggest Victims
The five richest Americans, according to the most recent ranking by Forbes magazine, saw the value of their principal holdings shrink by nearly $4 billion during Monday’s stock market sell-off. Following is a list of those five billionaires and the drop in value for their holdings:
* Bill Gates, chairman and chief executive of Microsoft Corp., $1.76 billion
* Warren Buffett, chairman and CEO of Berkshire Hathaway Inc., $717.3 million
* Paul Allen, co-founder of Microsoft Corp., $600 million
* Larry Ellison, chairman, CEO and president of Oracle Corp., $666.9 million
* Gordon Moore, chairman of Intel Corp., $236.2 million
Source: Associated Press; most recent proxy statements filed with the Securities and Exchange Commission.
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Bad Days on Wall Street
The 12 biggest one-day percentage declines in Dow Index
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Oct. 19, 1987 508 points 22.61 percent. Oct. 28, 1929 38.33 points 12.82 percent. Oct. 29, 1929 30.57 points 11.73 percent. Nov. 6, 1929 25.55 points 9.92 percent. Dec. 18, 1899 5.57 points 8.72 percent. Aug. 12, 1932 5.79 points 8.40 percent. March 14, 1907 6.89 points 8.29 percent. Oct. 26, 1987 156.83 points 8.04 percent. July 21, 1933 7.55 points 7.84 percent. Oct. 18, 1937 10.57 points 7.75 percent. Feb. 1, 1917 6.91 points 7.24 percent. Oct. 27, 1997 554.26 points 7.18 percent.
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