U.S. Stocks Plunge as Asia Crisis Fuels Investors’ Fears
The U.S. stock market fell sharply Friday as the Indonesian currency plunge--and the sight of the country’s residents hoarding food in a Depression-like panic--renewed fear that Asia’s financial crisis will hurt the U.S. economy much more than previously thought.
Stocks also sold off after a better-than-expected U.S. jobs report convinced some investors that the Federal Reserve might not lower interest rates immediately. The government report showed that the nation added 370,000 jobs last month to cap the strongest employment picture in 24 years.
The conflicting signs of a surging U.S. economy but faltering global markets have perplexed investors and policymakers.
On one hand, the U.S. economy is enjoying vibrant job growth, moderate wage gains and virtually no inflation. But fears are mounting that it’s only a matter of time before the deepening Asian financial turmoil infects the domestic economy and dramatically eats into U.S. corporate profits.
Those worries were behind the sell-off that sent the Dow Jones industrial average down 222.20 points, or 2.9%. It was the market’s biggest drop since it nose dived 554 points, or 7.2%, on Oct. 27, and it punctuated a turbulent week in which tumbling foreign markets pushed the blue-chip index down 4.8%--the biggest weekly drop since mid-October 1989.
“It’s going from a financial crisis to, in some places, a financial collapse,” said Alan Skrainka, chief market strategist at Edward Jones & Co. in St. Louis. “When you see a Depression-style run on grocery stores in Indonesia, that’s the signal we’ve moved to a new phase of the crisis.”
Because of the fear and uncertainty, many investors are simply pulling money out of stocks into safer havens, such as short-term bonds.
The way the stock market has started the year does not bode well for the rest of 1998. The performance of stocks in January has traditionally served as a barometer of their showing for the entire year, and the first five days has been a gauge of their strength for the month.
Many analysts believe that the stock market will be hard pressed to maintain the unprecedented gains of the past three years, when the Dow industrials surged better than 20% each year.
Investors are now focusing on the deteriorating situation in Indonesia, where stock and currency values have slumped amid worries that an economic aid package will fall apart because the Jakarta government has balked at implementing tough fiscal restraints.
On Thursday, after the currency lost nearly a fourth of its value in one day, thousands of the country’s panicked residents jammed grocery stores to stock up on food, and President Clinton sent Deputy Treasury Secretary Lawrence Summers to meet with Indonesian President Suharto.
The Indonesian turmoil, which follows by only a few weeks a major bailout of South Korea, has erased hope a little more than a week ago that the worst of the Asian debacle had passed.
The International Monetary Fund and major governments have cobbled together aid packages to right the Asian economies. But the plans require stringent fiscal sacrifices that, at best, are likely to leave most Asian nations in, or close to, recession this year.
“It’s the constant bad news every day you come to work,” said Robert Bissell, chief investment officer of Wells Capital Management in Los Angeles. “For a while, it was what was happening in South Korea and how bad that was. And now it’s Indonesia. It’s like a flu that keeps spreading.”
The Asian crisis hurts U.S. companies in two ways.
Sagging Asian economies mean U.S. companies can sell fewer goods in the region. Also, suddenly weaker Asian currencies mean those countries can now export cheaply priced goods into the U.S., potentially forcing American companies to lower their prices.
Those worries have prompted talk lately about the possibility of deflation. That could create a unique set of problems in the U.S. by shrinking corporate earnings and perhaps triggering job cuts as companies scramble to maintain their profit margins.
The talk of deflation was fed last week when Federal Reserve Chairman Alan Greenspan addressed the topic in a speech.
On Thursday, Fed Gov. Laurence Meyer said he does not believe that significant deflation will occur, but he added that “a much larger spillover from the Asian crisis would encourage an easing” of credit.
A few prominent market experts have suggested that the U.S. has entered a bear market where stock prices fall 20% or more.
The Dow is 8.2% off its Aug. 6 high. The experts point to the fact that Wall Street has consistently underestimated the scope of Asia’s travails since its crisis started in July and broke out into the open in October.
But many other Wall Streeters dismiss that thinking. While Asia is sure to slow U.S. economic growth, they argue that the U.S. economy is too strong and diversified to be crippled by problems abroad.
That economic vibrancy was on display Friday when the government reported that the U.S. added almost twice as many jobs in December as forecast by economists, with a record 64.1% of Americans working. Despite the jobs number, wages ticked up only moderately and fell from their level in November.
As Asia’s financial crisis has worsened recently, Wall Street has come to expect the Fed to lower interest rates to spur the global economy and prevent deflation from taking hold.
Investors still believe that the Fed will cut rates at some point. But the heavy job creation, despite the absence of inflationary pressure, may persuade the central bank to hold off for the moment.
Greenspan has long been known as an inflation hawk who has leaned toward raising rates at the first sign of rising prices.
“The news today lessens the possibility of a Fed rate cut,” Skrainka said. “You don’t want to cut interest rates if the domestic economy is so strong it might bring back inflation.”
With the stock market gyrating, a growing number of investors are heading for the safety of the bond market.
That pattern continued Friday, when buying demand pushed the yield on the 30-year Treasury bond down to 5.73% from 5.74% on Thursday. Yields on shorter-term bonds fell by greater amounts. That is a sign investors expect the Fed to lower interest rates at some point.
As yields have fallen recently, many U.S. companies have rushed to sell bonds to take advantage of low borrowing costs, and investors have gobbled up the issues.
Low rates have been a boon to homeowners and home buyers by causing mortgage rates to fall. Mortgage refinancing activity has picked up noticeably, and banks expect the trend to gain even more steam in coming weeks.
Falling bond yields and lack of inflation are usually good signs for the U.S. economy and might, under normal circumstances, actually push up stocks.
But fear about the Asian crisis is too great.
“The international events are overwhelming the domestic numbers,” Bissell said.
The dangers of deflation were in ample supply Friday.
Owens Corning, a maker of home-insulation products, said it will fire 2,200 people, close factories and report disappointing 1997 earnings. The company blamed competition that has forced down prices and wreaked havoc with its business.
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The effects of cheaper exports from Asia also took a toll on the stocks of paper companies.
Shares of International Paper Co. and other U.S. forest-products companies sank after Merrill Lynch & Co. said demand is falling at the same time that Asian producers are stepping up output of cheaper goods.
A wide variety of commodity prices have been plunging to multiyear lows lately as demand from Asia has fallen off.
On Friday, cotton fell to a four-year low after the government said supplies were larger than expected after the second-largest crop in history.
Stocks of banks, technology companies and oil producers all have been hit recently because of worries over Asia.
Investors have fretted that banks will suffer if Asian borrowers default on loans, while tech stocks have been clipped amid fear that Asian companies will delay previously scheduled purchases. Oil stocks have suffered because of rising supply, warm weather in the U.S. and falling demand from Asia.
Overall, Wall Street is increasingly worried that projections about U.S. corporate earnings this year are too high and are likely to disappoint investors. That would be dangerous for a market still trading near all-time highs that has shown little tolerance for disappointment.
On Friday, Asian worries slammed markets in Latin America. Mexico’s Bolsa index sank 6%, and Brazil, Argentina and Venezuela all lost between 4% and 6%. In Asia, Hong Kong’s Hang Seng fell almost 4%, while the Philippine Stock Exchange tumbled 8.3%.
* ASIAN WORRIES
Japan, with $21 billion invested in Indonesia, braced for the worst, while Latin American markets saw heavy selling. D1
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Vanishing Gains
The stock market gains from Wall Street’s December rally disappeared in Friday’s 222-point drop.
Weekly closes, Dow Jones industrial average:
Friday: 7,580.42
Source: Bloomberg
