The market sends a message
THE other day's dip on the roller-coaster ride called Wall Street was not unexpected, given rising interest rates and the continuing decline in the dollar. Still, a drop of 95 points in the Dow Jones industrial average Wednesday, although only a 3.8 percent decline overall, was not an everyday event. The Dow, as of this writing, has lost 309 points (an 11 percent fall) since its high in late August. The long bull market may or may not be over. Time will tell. What is clear is that the financial community is sending a signal of concern about United States trade policy - as well as the upward course of interest rates in the US.
The pretext for the midweek downturn was the release of the government's latest trade figures, which showed a larger-than-expected deficit for August, as well as a jump in the yield on long-term government bonds to more than 10 percent. Computer-led program trading added to the slide. The dollar fell against most major currencies midweek. Barring strong intervention by central banks during the weeks ahead, the downward pressures on the dollar are expected to continue, igniting apprehensions about more inflation in the US and more rises in interest rates, which could threaten the expansion.
Most analysts concede that this week's trade report, by itself, was not the culprit behind market concern. Indeed, there was more untidy news yesterday as the Commerce Department announced a modest downturn in US retail sales for September.
But the trade report by itself was also not all that bad. The deficit actually narrowed somewhat (to $15.68 billion in August, from a record $16.47 billion deficit in July). And the negative numbers actually masked an improvement in US exports.
The underlying economy continues strong, with no recession yet in sight. Unemployment is now below 6 percent. The manufacturing sector is rebuilding. Purchasing orders have been positive.
The challenge remains the sagging dollar and apprehensions about interest rates. West Germany and Japan have increased rates. US rates will have to rise to remain competitive. Implications for policymakers are threefold:
Monetary policy: The Federal Reserve Board must be alert not to overreact on tightening credit. Money supply growth has been down. As Fed chairman Alan Greenspan has noted in recent days, there is not yet any indication that inflationary pressures are getting out of control.
Trade policy: The administration's goal of substantially raising exports by forcing down the dollar has not exactly proved a smashing success. But the trade figures would probably be worsened, not helped, by enactment of a punitive trade law, as is now working its way through Congress.
Deficit action: Wall Street has largely written off inaction on the budget deficit. But that adds up to a failure by the nation's highest elected officials. This week's financial news should remind Washington of the work to be done in reducing the deficit.