Global Stock Markets Tumble on Rate Fears
World stock markets fell sharply Tuesday as euphoria over the tranquil changeover to year 2000 gave way to fresh fears that rising interest rates could hammer highflying shares.
The declines, while modest compared with many markets’ gains in 1999, nonetheless raised questions about the potential for heavier selling if more investors rush to cash out--though many experts said it was too early to predict a deeper slide.
Ironically, although President Clinton’s reappointment Tuesday of Federal Reserve Chairman Alan Greenspan to a new term was strongly supported by Wall Street, some investors thought the vote of confidence in Greenspan could embolden him to raise interest rates sharply at the Fed’s Feb. 1 meeting.
Still, analysts also said that many investors selling Tuesday may simply have been locking in some of last year’s stunning profits.
In the worst market sell-off in 15 months, the technology-dominated Nasdaq composite index, which had rocketed 86% in 1999 and 48% in just the last three months, tumbled a record 229.46 points, or 5.6%, to close at 3,901.69.
It was the index’s eighth-worst percentage decline ever.
The Dow Jones industrial average slid 359.58 points, or 3.2%, to 10,997.93, its biggest point drop since August 1998, when it fell 512 points from a less lofty 8,051.
Across Europe and Latin America, stock markets fell just as hard or worse, mainly in reaction to U.S. interest rate concerns.
And early today in Asia, markets there followed suit: The main Hong Kong stock index was off 7.8% at midday. Japan’s main index was down 3.2% and South Korea’s was down 6.3%.
Global investors generally like Greenspan, a Republican whose tenure at the Fed--dating to August 1987--has coincided with the century’s greatest bull market and what will soon be America’s longest peacetime economic expansion.
But Greenspan’s Fed raised short-term interest rates three times in 1999 in an effort to slow the U.S. economy’s heady pace and subdue inflation pressures. Yet the economy has continued to steam ahead.
Moreover, Greenspan and other Fed governors have on many occasions raised questions about the stock market’s advance, and whether the level of speculation in stocks could in the long run be dangerous for the economy.
By raising rates sharply, the Fed could not only slow the economy, but also the bull market.
Although the Fed had insisted it does not “target” the stock market with interest rate increases, “It could be the market fears the worst: that Greenspan now feels he has a mandate and doesn’t have to pussyfoot around,” said Thomas McManus, senior equity strategist for Banc of America Securities in New York.
Analysts said market sentiment has shifted from expecting a quarter-point hike in the Fed’s key rate, now 5.5%, at the Feb. 1 meeting, to a feeling that a half-point increase now is quite possible.
Most economists believe the Fed held back on raising rates in December only because of concern about Y2K-related computer problems.
A report Monday that the U.S. manufacturing sector had logged its 11th straight month of expansion in December worsened concerns about higher rates, sparking one of the worst bond-market sell-offs in a year.
On Tuesday, bond yields fell back somewhat, with the bellwether 30-year Treasury bond easing to 6.53% from 6.61% Monday. But yields are still at their highest levels in more than two years.
Despite the sharp advances in technology stocks last year, rising interest rates “have already affected the vast majority of stocks in the market,” McManus said, noting that fewer than half of U.S. stocks managed any gain at all last year.
Until now, however, technology issues such as Microsoft, Qualcomm and Oracle have seemed immune to rate concerns.
It is a basic law of finance that rising interest rates erode the value of future corporate profits and stock gains, but technology enthusiasts say that the growth of the Internet and of wireless communications, for example, are still in their early stages, with such astronomical profits on the horizon as to more than offset the effects of rising rates.
That may be possible for a tiny handful of tech firms, said market strategist Ronald J. Hill of Brown Bros. Harriman. But the most likely scenario for the months ahead is a sharp market decline that will bring stock valuations--as measured by price-to-earnings ratios--into a more normal range, he said.
Hill said that could imply a drop of 30% to 40% in the coming months, which would be well into the territory that Wall Street defines as a bear market.
It would be a severe test of faith for investors, but Hill said he expects the market to regain its upward momentum afterward, with tech shares again leading the way.
“For nine years buying on the dips has been the right thing to do, and I see no reason why that shouldn’t prevail again,” he said.
By contrast, Richard Cripps, stock strategist for Legg Mason in Baltimore, anticipates a “classic correction of valuation” that probably won’t result in more than a 10% or so decline in prices of major stock indexes.
“The sentiment is still out there for the tech stocks,” he said.
Rather than a wholesale retreat, Cripps said Tuesday’s action represented “people who own 1,000 shares selling 300 of them.”
Some market watchers have been expecting a big January rally, reasoning that funds kept on the sidelines by cautious money managers would pour into the markets if the Y2K transition went off smoothly.
But Elizabeth MacKay, chief strategist for Bear Stearns Cos., noted that many investors got their bets down early, fueling an explosive December rally that lifted the Nasdaq index by 22% that month.
Wall Streeters pay attention to January trading because it can set the tone for the full year. Since 1950, the Dow has had 13 “down” years and 10 of them began with a loss in January.
MacKay also is in the camp that expects only a 10% correction in stock prices.
“Any portfolio manager with a little gray hair probably is somewhat nervous and wants to trim some tech holdings,” she said.
For Nasdaq, however, a 10% pullback would be little more than a speed bump. Tuesday’s losses only brought the composite index to where it stood on Dec. 21.
MacKay sees a more significant “calendar” effect later in the year: the presidential election. Since 1952, she noted, the market has always risen from June through December in an election year.
Greenspan’s early reappointment--his term doesn’t expire until June--could make such a scenario even more likely, she said.
If the Fed acts aggressively early in the year and achieves the economic slowing and stock market cooling that it seems to want, the stage could be set for a late-year rally, MacKay said.
In any event, the Fed traditionally shies away from making bold interest rate moves late in an election year out of fear that it will be accused of political interference--trying to nudge the economy in one direction or another for the benefit of a particular candidate or party.
* GREENSPAN WINS NOD
Fed chairman renominated. C1
* BLIP OR TREND?
A Q&A; look at the sell-off. C1
* GETTING BURNED
The risk of hot funds. C1
