Investors Not Easily Reassured
U.S. stocks gyrated wildly again Monday, extending a slide that threatens to stall growth and exposing the limits of American leaders’ ability to affect the course of economic events.
Edgy investors barely noticed President Bush’s second attempt in as many weeks to accent the economic positive as they drove down the Dow Jones industrial average more than 400 points before erasing all but 45 points of those losses in the final 90 minutes of trading.
Bush told a Birmingham, Ala., audience that the nation is on the economic rebound. “In spite of the fact that we’ve been in a slump for a while ... the economy is coming back. That’s a fact,” he said.
The president’s outlook undoubtedly will be seconded today when Federal Reserve Chairman Alan Greenspan gives Congress his semiannual assessment of the economy.
But a variety of analysts said neither man has much power to convince investors, concerned consumers and stubbornly pessimistic executives.
“This is the story of a bubble; what went up in the late 1990s is coming back down,” said David M. Jones, a Denver economic consultant and longtime Fed watcher. “Bush couldn’t do much about it, and Greenspan isn’t going to be able to change the trajectory either.”
What in effect has happened, according to analysts, is that the steady drumbeat of accounting scandals and revelations of executive self-dealing has caused doubts that initially were confined to the dot-com and telecom worlds to spread to virtually all of corporate America.
“People don’t know what to believe about any company at this point,” said Jason Trennert, a managing director with ISI Group, a New York investment strategy firm. “Until they know where all the bodies are buried, it’s going to be a very tough market.”
The spread of doubts has come at a particularly unfortunate moment--just as the ability of policymakers such as Bush and Greenspan to do much about them has been greatly diminished.
In the president’s case, the problems include the sudden reemergence of multibillion-dollar budget deficits after years of surplus, and what both Democratic and Republican critics charge is the White House’s use of accounting gimmicks to keep the numbers from appearing even larger.
“For the businesspeople running the administration, this has got to be a nightmare,” said University of Wisconsin political scientist Charles O. Jones.
In the Fed chairman’s case, the problem is twofold. The Fed already has cut short-term interest rates to a four-decade low in a move that has thrilled home and car buyers but failed to rekindle crucial business investment. Also, Greenspan has steadfastly said he doesn’t have the right or the power to influence the very thing that most worries many people at the moment, the tumbling stock market.
Dollar Continues to Fall
Given these circumstances, analysts predicted, the central banker will spend most of today arguing that the nation’s real economy, which produces goods and services, is growing again, and that the effects of falling stock prices will remain confined to a small slice of the public at the very top of the nation’s income pile.
“I wouldn’t mind if he said something to cheer people up, but I wouldn’t bet on it,” said Bennet T. McCallum, an economist at Carnegie-Mellon University in Pittsburgh and a member of the Shadow Open Market Committee, a group of private analysts who follow the Fed closely. He certainly won’t do it by promising more interest rate cuts, McCallum added.
Monday’s bad news went well beyond bouncing stock indexes. The value of the dollar continued its fall against other currencies, signaling that foreign investors, who have been big buyers of U.S. stocks in recent years, are taking their money elsewhere.
The dollar fell below the euro, the European currency, for the first time in 2 1/2 years and slipped as well against the Japanese yen. Its value has declined almost 15% since February after rising steadily since the mid-1990s.
“All these corporate scandals have hurt our reputation. [Foreign investors] don’t know where the next shoe is going to drop and they’re not waiting to find out,” said Morris Goldstein, a senior fellow with the Institute for International Economics, a Washington think tank.
The Dow, already down about 150 points when Bush began speaking, dropped an additional 40-plus points but then bounced back. However, hours after the president’s speech, the index headed back down with a vengeance, plummeting almost 440 points to within a hair’s breadth of its lows in the aftermath of the Sept. 11 attacks before snapping back to close down 45.34 points, or 0.5%, at 8,639.19.
The broader Standard & Poor’s 500 index traced a similar path, plunging below the 900 mark for the first time since the fall of 1997 before coming back to close down 3.46 points, or 0.4%, at 917.93. The tech-heavy Nasdaq composite index actually ended the day up 9.12 points, or 0.7%, at 1,382.62. Nasdaq last week fell to a five-year low.
Senate Passes Reforms
Monday’s wild swings followed six weeks of tumbling stock prices that market players attributed almost entirely to corporate scandals and that have produced loud calls for reform.
Two of the proposed reforms--to establish an independent board to regulate accountants and impose new criminal penalties on executives who cheat investors and employees--zipped through the Senate late Monday on a surprising unanimous vote.
They now must be reconciled with less stringent House measures.
But most analysts are not waiting for the panel to end the market’s fall. They think a Securities and Exchange Commission order that top executives of the nation’s 1,000 largest public companies personally vouch for their firms’ financial figures by Aug. 14 will flush out any further problems.
“Then investors will know what they’re dealing with,” investment strategist Trennert said.
In the meantime, analysts said, business and government leaders will seek to reassure the public with an argument that would have seemed heresy only a few years ago, namely that whatever the stock market does is of little consequence to the economy.
Main Street Issues
Greenspan in particular has pushed this point in recent public appearances and is likely to do so again today before the Senate Banking Committee.
Greenspan will rely heavily on Fed research reports that appear to contradict widespread claims during the 1990s that Wall Street and Main Street were merging as even average Americans became stock investors to provide for their retirements.
The studies conclude that the share of stocks, bonds and mutual funds held by the wealthiest fifth of American families barely budged during the decade, but instead remained in the fantastically high range of 70% to 80%.
The implication Greenspan draws is that the only people hurt by falling share prices are the rich who can afford it. The remaining 80% of Americans, most of whom have their wealth tied up in their homes, whose values have continued to rise, can keep on buying and propping up the economy in the process.
But former Fed economist Dean M. Maki, the studies’ coauthor, suggested Monday that the conclusion may be unwarranted. Maki said that although stock holdings of the vast majority of Americans pale beside those of the wealthy minority, they play a crucial role in their finances.
“Less wealthy people appear to be a little more sensitive to changes in the value of their securities holdings than wealthier ones,” said Maki, now an economist with Putnam Investments, a Boston mutual fund firm.
“I’m not expecting [the recent stock market fall] to cause the economy to slip back into recession,” he said. “But it is a force of weakness, and it could combine with other forces to put us back into recession.”
Maki’s conclusions square with those of political pollsters, who find growing economic worries and outrage over corporate scandals at all income levels.
“A lot of people may have more hope than money invested in the stock market,” said Democratic pollster Mark Mellman. “But hope counts mightily in politics because, for many people, it’s their hope for a comfortable retirement that’s at stake.”
