Icy Splash for Investors
The spectacular gyrations of the leading stock markets, especially the plunge and partial recovery of the Nasdaq Tuesday, had no clear cause. But the extraordinary action could do some good if it shocks investors back to economic reality.
The roller-coaster ride sent the Nasdaq composite index, which is loaded with technology and Internet stocks, plunging 574 points, or 13.6%, by shortly after 10 a.m. PDT--then almost as steeply upward to recover much of the loss.
The Dow Jones industrial average plummeted by a smaller percentage, and it too recovered, ending the day down just 57 points.
The swing on both markets, which at the bottom would have wiped out at least $1.2 trillion from the market value of publicly traded U.S. companies, was without precedent. Investors who had to sell on the dip to repay margin loans were among the hardest hit.
Wednesday’s trading had none of that drama. The Nasdaq rose 20 points, while the Dow Jones continued sliding, closing nearly 131 points down. For the year, the Dow is down about 4%, but the Nasdaq is still ahead.
Federal Reserve Chairman Alan Greenspan has long maintained that because overvalued stock prices increase individual worth, they lead to greater spending and thus to inflationary pressure. That, of course, is what he has tried to prevent with interest rate hikes. His efforts may be bearing fruit.
The index of leading economic indicators, which predicts economic growth three to six months ahead, fell 0.3% in February for the biggest monthly drop in four years. Factory orders for some capital goods are down as well.
Speaking to a White House conference Wednesday on the so-called new economy, Greenspan admitted that “something profoundly different” is happening across the U.S. economy, not all of which is readily apparent to traditional economists. What Tuesday’s stock market frenzy proves again is that economic uncertainty goes hand in hand with stock market volatility.
Investors who have flocked to the market in recent fat years need to bone up on business fundamentals, gaining some understanding of the companies they’re investing in. It’s a good time to hedge risks with knowledge.
