A little context from the WSJ (better copy at site)
largest pullbacks/corrections in major market indexes, 1995-1998
DATE OF PEAK
ÿÿÿÿDATE OF LOW
ÿÿÿÿ% CHANGE
ÿÿDJIA
ÿ
ÿ
ÿÿÿÿAug. 6, 1997
ÿÿÿÿÿÿOct. 27, 1997
ÿÿÿÿÿÿÿÿÿÿ-13.3%
ÿÿÿÿJuly 17, 1998
ÿÿÿÿÿÿAug. 27, 1998
ÿÿÿÿÿÿÿÿÿÿ-12.6
ÿÿÿÿMarch 11, 1997
ÿÿÿÿÿÿApril 11, 1997
ÿÿÿÿÿÿÿÿÿÿÿ- 9.8
ÿÿÿÿMay 22, 1996
ÿÿÿÿÿÿJuly 23, 1996
ÿÿÿÿÿÿÿÿÿÿÿ- 7.5
ÿÿS&P 500
ÿ
ÿ
ÿÿÿÿJuly 17, 1998
ÿÿÿÿÿÿAug. 27, 1998
ÿÿÿÿÿÿÿÿÿÿ-12.1
ÿÿÿÿFeb. 18, 1997
ÿÿÿÿÿÿApril 11, 1997
ÿÿÿÿÿÿÿÿÿÿÿ- 9.6
ÿÿÿÿAug. 6, 1997
ÿÿÿÿÿÿOct. 27, 1997
ÿÿÿÿÿÿÿÿÿÿÿ- 8.7
ÿÿÿÿMay 24, 1996
ÿÿÿÿÿÿJuly 24, 1996
ÿÿÿÿÿÿÿÿÿÿÿ- 7.6
ÿÿNasdaq Composite
ÿ
ÿ
ÿÿÿÿJune 5, 1996
ÿÿÿÿÿÿJuly 24, 1996
ÿÿÿÿÿÿÿÿÿÿ-16.6
ÿÿÿÿJuly 20, 1998
ÿÿÿÿÿÿAug. 27, 1998
ÿÿÿÿÿÿÿÿÿÿ-16.3
ÿÿÿÿOct. 9, 1997
ÿÿÿÿÿÿDec. 24, 1997
ÿÿÿÿÿÿÿÿÿÿ-14.1
ÿÿÿÿJan. 22, 1997
ÿÿÿÿÿÿApril 2, 1997
ÿÿÿÿÿÿÿÿÿÿ-13.5
Source: WSJ research
Russia accounts for less than 1% of U.S. exports. But part of the bullish thesis behind the
long upward rise in stocks is that as more and more parts of the world were entering the
market-driven capitalist system, it offered vast new opportunities for economic growth and
sales for U.S. companies. The events in Russia in recent days have severely tested that
assumption.
"The extreme risk here is that for all intents and purposes, Russia is in the process of exiting
global capitalism," says Jeffrey Applegate, the bullish investment strategist at Lehman
Brothers. "Let's keep this in perspective. Russia's gross domestic product is equal to about
4% of U.S. GDP. But they're the second-biggest nuclear power, and that's another degree of
risk."
One country's implosion wouldn't be so bad, except that it's not just one. The financial crisis
started a year ago with Thailand, spread to the rest of the Asia, then Russia, and is now
threatening Latin America. Thursday, the central bank of Canada, the U.S.'s largest trading
partner, jacked interest rates up a full percentage point in an unsuccessful attempt to stem the
fall in the Canadian dollar, a victim of plummeting commodity prices.
Through this foreign turmoil, the U.S. economy has continued to sail steadily, underpinned by
buoyant domestic consumption. But eventually, if enough of its trading partners catch
Asian-like problems, the U.S. economy is bound to feel it, too. There is also the risk that as
stock prices fall, consumers will respond to the loss of wealth by spending less, endangering
the domestic economy.
That the catalysts of the correction are primarily overseas only amplify the psychological nature
of the selling. U.S. investors are trading on secondhand information, says John Manley, stock
strategist at Salomon Smith Barney. "So they go to bed at 9 o'clock at night and wake up at 5
in the morning and their day has been made for them. A couple of weeks of that, there's a
tendency to get on the sidelines and say 'to hell with it.'ÿ"
But behind the uncertainty and terrible headlines, it's still difficult to prove that the
fundamental underpinnings of the market are dissolving.
"U.S. stocks have overreacted to the incremental information," says Abby Joseph Cohen,
Goldman Sachs's bullish strategist. "What are the economic ramifications of what's going on?
I can cite all kinds of numbers that sound calming: we do 0.8% of our foreign trade with
Russia. We've talked to many of the banks we follow, and they say they're fully reserved for
exposure to the nations attracting attention. So it doesn't sound like the economic impact on the
U.S. will be very pronounced.
"But the first part of the contagion is, 'Omigosh, maybe I need to re-examine my
assumptions.' " She judges stocks to be undervalued and is sticking by her year-end target of
9300 on the Dow industrials.
Adds Mr. Applegate, "Roughly ... 85% of U.S. profits come from the U.S. and Europe.
Unless you can make a case that you have significant problems in those regions, it's tough to
make a case you have a global recession and global bear market."
Furthermore, there is key support for stocks in the fact that 30-year bond yields have fallen to
their lowest levels since the 1960s.
"A classic bear market in the U.S. is always driven by Fed tightening, rising interest rates and
a sharp correction in the bond market," says Stephen Roach, chief economist at Morgan
Stanley Dean Witter. "If we get a bear market because of the Asian currency crisis, this is
unusual, this is as atypical as it's ever been. The odds of that have certainly increased: This is
an unprecedented global currency crisis."
Both those fundamental positives -- continued, if softer, profit growth and falling interest rates
-- carry huge caveats. One is that profit expectations have been falling all year and are likely to
fall further, especially with "preannouncement" season fast approaching.
There is also a growing minority view that the current business cycle differs fundamentally
from others in the postwar period. The collapse in foreign markets and commodity prices
means an inability to raise prices has become a major threat to corporate profits. That is good
for bonds, bad for stocks, and thus the fall in bond yields is not helping much.
For the first time in postwar history, selling prices are declining year over year for the
corporate sector as a whole in the middle of an economic boom, says Warren Smith, managing
editor of Bank Credit Analyst ForeTrends, a Montreal financial forecast journal. He thinks
stocks will eventually fall 20% to 25% from their highs.
"This is unusual in the postwar period but it's not unprecedented in history," says Jeremy
Siegel, a professor of finance at the University of Pennsylvania's Wharton School of
Business. The last deflationary bear market, in which "stock prices continue to plunge with
interest rates, was the 1930s. That's a condition that didn't exist in the 1960s and 1970s when
inflation and higher interest rates were the biggest sources of the bear market."
Prof. Siegel isn't predicting a rerun of the 1930s plunge, but he is pessimistic for the short
term: "It's very hard for the market to mount another increase until the earnings picture clarifies
and the resumption of strong earnings can take place. That may take quite a while." But he
adds, "For long-term investors, I still think stocks offer good value and in fact better value
than two months ago."
In the short term, at least, there might be a benefit in the extreme pessimism taking over the
markets. Contrarian theory holds that markets can only recover at the point of maximum
pessimism when there's no more selling left. The bullish percentage of investment advisers
surveyed by Investors Intelligence this week has fallen to 40% from 54% five weeks ago,
while the bearish percentage has risen to 39% from 23% (the balance expect a correction). |
