All Eyes On Global Markets After Wall Street Drop
Tokyo, London exchanges may signal which way New York moves
AMERICA's political leaders and the world will be watching this week's trading on Wall Street, Tokyo, and London stock markets with special care following last Friday's sudden market drop here. Today's trading should reveal whether Friday's 190.58 point drop in the New York Stock Exchange's Dow Jones Industrial Average was a fluke, or part of a deeper problem on Wall Street.
Last Friday's 6.9 percent decline on the Dow, which brought the stock index to a close at 2,569.26, was the second-worst point loss in a single trading day in history. It was exceeded only by the 508-point plunge in the market on Oct. 19, 1987.
Harkening back to that day, analysts noted that the big drop followed a 109-point drop on the previous Friday. Despite obvious parallels, analysts say it will be the outcome of trading in Tokyo - which began last night - that is most likely to influence the direction of the New York markets when they open today. In October 1987, the Tokyo markets fared badly following New York's Friday nose dive, apparently prompting the record Monday plummet in 1987.
Such activity raises the question as to whether the great bull market of the 1980s has finally come to an end? While some analysts believe the market may only be going through a harsh ``technical correction,'' debate continues over whether the volatile market suggests deeper problems in the overall US economy.
Last Friday's loss ``doesn't signal any fundamental change in the condition of the economy,'' says Treasury Secretary Nicholas Brady. Federal regulators and market officials, meanwhile, were quick to assure the public that adequate technical tools are now at hand - such as the use of trading halts and other circuit breakers designed to pull the plug on pell-mell program trading - to prevent a recurrence of the enormous losses of 1987. Others, however, were less sanguine.
``We are going to get many more of these volatile downturns,'' says Avner Arbel, a professor of finance at Cornell University. Professor Arbel, co-author of a study of the 1987 downturn entitled ``Crash: Ten Days In October. Will It Strike Again,'' was a consultant to the Brady Commission, appointed by the White House to determine the causes of the 1987 crash.
Some financial experts believe that whatever happens this week, there will be more turbulent days ahead for Wall Street.
``What we saw this past weekend was a very clear statement about a substantial percentage of the market that is based on speculation and takeover activity,'' says George Brown Jr., executive vice president of DRI-McGraw Hill, an economic consulting firm in Lexington, Mass.
What the investment community must now realize, says Mr. Brown, is that the use of debt in the form of high-interest-rate ``junk bonds'' to finance leveraged buyouts [LBOs] of companies and other intricate corporate takeover offers ``a very attractive return, but has very high risk as well.'' From here on out, investors will need to sort through such leveraged buyouts on a careful case-by-case basis, Brown says.
The United States economy is ``in a learning process,'' says Brown. While its growth is slowing, DRI still does not see any overt signs of recession - though there appears to be a growing vulnerability to downturn. DRI believes annual growth for 1989 will come in at about 2 percent.
``But the 2 percent estimate makes the economy look more vibrant than it is,'' Brown says. ``We are talking about a fairly soft economy.'' Such softness invites the possibility of economic mistakes and recession, he says.
Last Friday's market panic appears to be linked to investor concerns that the takeover boom of recent years - which has fueled much of the dramatic rise in stock prices - is over. That possibility seemed to be enunciated most clearly when it was announced Friday that a group trying to purchase UAL Inc., the parent company of United Airlines, was unable to find sufficient backing for a debt-financed deal.
Other factors adding to Friday's worries: declining corporate profits, which have fallen in the past three consecutive quarters; heavy computer program trading, which kicked off sell orders when the market drops sharply; and a reported rise in wholesale prices in September, suggesting that inflation was heating up. This fueled fears that the Federal Reserve Board would restrict monetary growth by refusing to further cut interest rates.
One of the lessons of October 1987 was that a downturn in the stock market does not necessarily mean a downturn on Main Street, says Robert Hamada, deputy dean and professor of finance at the Gradate School of Business at the University of Chicago. Dr. Hamada notes that 1987's experience shows that the larger economy moved on, essentially irrespective of what was happening on Wall Street.
``Stock holdings today are highly concentrated in the hands of a very few people,'' says Marshall Blume, a professor of finance at the Wharton School at the University of Pennsylvania. ``So most people won't change their savings or other investment behavior much based just on the market.''
Arbel believes Washington needs to set up a more centralized regulatory system. He also says existing ``circuit breakers'' designed to forestall a crash need to be rechecked to see if they go far enough - and, most important - that ``we have to find some way to control risk-taking with other people's money.''