U.S.-FINANCE: Stock Market Crash Gives New Life to Old Worries

By Farhan Haq Reprint | | Print |

NEW YORK, Oct 28 1997 (IPS) - The 554-point collapse of the Dow Jones industrial average Monday was not entirely unexpected, but Wall Street investors and analysts nevertheless are confused about how to respond to the largest point decline in American stock exchange history.

Trading on the New York Stock Exchange was suspended shortly after 3:00 p.m. Monday until Tuesday under a decade-old rule which allows traders to use such “circuit-breakers” in the event of a fall of more than 550 points. This was the first such trading suspension since the “circuit-breakers” were introduced in 1987 – after the stockf exchange suffered a 500-point decline.

“The measures to halt trading…went into effect automatically, as designed,” said Treasury Secretary Robert Rubin, who emphasised that the federal system to prevent a steeper drop had worked.

“It is important to remember that the fundamentals of the U.S. economy are strong,” Rubin added — an assertion echoed by the White House Monday evening.

Nevertheless, the damage was done before the circuit-breakers took hold. The Dow Jones average lost 7 percent of its value, dropping to 7161 points before trading was halted. A variety of other indicators, from the NASDAQ composite index of stocks to other exchanges, fell between 6 and 7 percent.

Many traders have feared for some time that the speculative bubble had built too high and that the stock market was due for a “correction”. The market “had been overvalued for some time,” Roy Blumberg of the investment firm of Josephthal, Lyon and Ross told the Cable News Network (CNN) on Monday.

The recent currency and stock troubles in Southeast Asia, in which Hong Kong’s Hang Seng index plunged by 10 percent last Thursday and fell sharply again Monday, were expected by some investors to have repercussions on Wall Street.

Nevertheless, stock market analysts are at a loss over whether the Monday collapse is the end of the slide, or just the beginning.

“This kind of panic behaviour usuallly doesn’t last for more than a couple of days,” Blumberg said, reflecting the views of many senior traders. The decline, he argued, was “in its latter stages.”

“The big question is whether this is something like (the collapse in) 1987, when the market fell apart with few real-world consequences, or whether it’s something worse,” countered Doug Henwood, author of ‘Wall Street’, a new history of the stock exchange.

At the very least, Henwood argued, the Monday crash did much to wreck the recent mystique that has grown around Wall Street as the stock market reached historic highs. “People have pointed to the stock market as proof that the American system is best,” he said. “This bull market has helped to tranquilise the population.”

The recent bust, which started as the currencies in Thailand and Malaysia declined and spread last week to Hong Kong’s investors, puts an end to that spell, Henwood contended. And it does so, he added, at a time when there are more U.S. families affected by the stock market’s rise and fall than ever before: 40 percent of U.S. households invest in the market today, about twice the traditional level even as recently as the 1980s. He cautioned, therefore, that the consequences of this crash will be more deeply felt than those which occurred in 1987.

Despite such worries, however, government officials and investors remain largely upbeat on the world economy in general. Some investment houses, including fund manager Jardine Fleming Unit Trusts, have advised caution over trading in Southeast Asia for the short term, but downplayed any long-term problems with the U.S. or global economies.

Chinese President Jiang Zemin, who arrived in Hawaii over the weekend, likewise urged investors not to back out of Asia. “I completely believe that rational investors will not, because of the changes in the stock market, lose their interest in the future economy of China and Hong Kong,” Jiang said at a news conference.

Yet the decline of the “Asian miracle” may have deeper consequences. “Asia was the one bright spot in the world economy. Now that its boom is disappearing, there aren’t any bright spots to point to,” Henwood argued. Moreover, he said, the sharp decline in world markets over the past week could do much to demonstrate the defects of the globalised world economy.

“(The crash) should do a lot to discredit the idea that free capital flows and open financial markets are the key to prosperity,” he said, noting that the Asian economies that most strictly followed World Bank and International Monetary Fund advice on economic reform have suffered the most in recent days.

Big stock losers in Monday’s NYSE fall included nearly all the information giants, with IBM losing eight dollars per share; Intel down 5.25 dollars a share; and MicroSoft, down 6.50 dollars a share. Other bulwarks of the U.S. economy, from General Electric (down four dollars a share) to American Airlines (down eight dollars a share), also declined sharply.