Soundness of the Economy Sends the Bulls Back In
What a relief. Cooler heads prevailed on Wall Street and brought the stock market roaring back Tuesday after the hugely unsettling rout the day before. Reminded of the fundamental soundness of the U.S. economy, traders shook off Monday’s fears and their emotional flight out of stocks, returning--at least for the moment--to hunt up bargains in New York.
Investors big and small plunged into opportunistic buying, sending the Dow Jones industrial average up a record 337.17 points. They apparently took comfort in reassurances from both President Clinton and Treasury Secretary Robert E. Rubin about the health of the economy. But the market psychology is still skittish, for plenty of reasons.
We are in unfamiliar territory: an unprecedented seven-year bull market punctuated by the single biggest point drop ever in the Dow and the highest percentage drop since 1987. Fear of the turmoil in Asian markets finally hit Wall Street so hard it caused a free fall that triggered two halts in New York trading.
Now investors are waiting for the economic assessment of Federal Reserve Chairman Alan Greenspan, who is scheduled to address the Joint Economic Committee of Congress today. In the past, Greenspan’s smallest hints of disapproval and most arcane comments on interest rates have spooked the market.
Despite the bright economy, many, including Greenspan, have recently described the stock market as overvalued. Some market correction had been expected, but the speed and ferocity of Monday’s sell-off were shocking.
Markets around the world have been nervous about plunging Asian markets since the summer, when several Southeast Asian countries suddenly devalued their currencies. Those markets were reacting rationally to badly managed and overextended economies in Thailand, Malaysia, Indonesia and the Philippines. Last week, the sell-offs hit the Hong Kong stock market, popping the property-speculation bubble there.
Southeast Asian nations ought to respond by freeing up their centrally planned economies. But they instead are likely to export their way out of their problems and curb imports, which could be bad news for the United States and its trade deficit. The huge volume of exports could push prices down worldwide and pose stiff competition in everything from semiconductors to cars.
But at least for now, the stock market roller coaster probably won’t undermine the nation’s economic growth. Many executives believe an eventual market correction of up to 10% is needed, so they are not fearful.
Inflation and interest rates remain low. With these fundamental strengths propping up the bulls, the bears haven’t knocked them out--yet.
