Is the Bull Market at an End?
$20 Billion a Month into Stocks
NEW YORK - As Wall Street's summer of discontent enters its final week, there is one question uppermost in the minds of both the professional trader and the average investor as they await Monday's opening bell: Are we at the end of the greatest bull market in history?
Last week saw the Dow Jones industrial average, that broad symbol of American capitalism, lose almost 515 points, or 5.65 percent of its value. Since peaking six weeks ago, the Dow has lost almost 14 percent of its value.
For many whose job it is to watch the whims of Wall Street and try to make sense of them, last week's swoon seemed different from other dips over the last decade. To them, the recent market turmoil might foreshadow a bear market - a sustained decline in stock prices like that of the early 1970s.
The saw-toothed nature of the Dow's descent, in which it struggles to recover from the prior day's losses only to end lower, increasingly suggests to analysts a more ominous phenomenon than just another short-term sell-off, or correction, like that of October 1987 or the one at the outbreak of the Gulf War.
''I think the consensus is rolling around that we're in the second inning of a bear market rather than the ninth inning of a correction,'' said Michael Molnar, who directs the trading of over-the-counter stocks at Salomon Smith Barney, one of Wall Street's financial giants.
What worries Mr. Molnar and other stock experts is that this time the drop in the Dow comes amid a worsening global economic climate that has seen currency and financial crisis spread from East Asia across the Urals to Russia and beyond to emerging markets in Latin America. Neighboring Canada has been affected, with a sharp drop in the value of its dollar. And some on Wall Street say President Bill Clinton's personal problems leave him without the stature to provide leadership that some think is needed at this moment.
The great truth of the stock market is that no one knows what will happen Monday - or beyond. But for 16 years now, the general trend has been up, and investors, particularly individuals, have been conditioned to believe that's the only direction for it to travel.
''When the bear really bites, we'll see,'' said George Summers, 58, a long-term investor who was outside the Charles Schwab & Co. brokerage office inside the World Trade Center. Mr. Summers said he was checking on his holdings of gold stocks at the office, a haven for those who frequently monitor their portfolios.
Individual investors could well hold the key to the market's immediate health. There is about $5 trillion invested in mutual funds, an economic force of such power that it can change the market. For years now, investors have been pouring money - as much as $20 billion a month - into stock funds, and if they continue to do so, that will keep markets buoyant for the long term.
But, tellingly, last month saw the first outflow of money from stock mutual funds as stock prices began their summer swoon. Reports from mutual-fund companies indicate that investors have begun moving to the sidelines, either into bond funds, which are considered safe havens, or into money-market funds, where they can earn interest on their money and still have easy access to it.
The uncertainty over investor sentiment could be felt 2,000 miles (3,200 kilometers) from Wall Street in Jackson Hole, Wyoming, where many of the world's top financial types gathered Friday for the annual summer conference of the Kansas City Federal Reserve District. The group had scheduled a discussion of income inequality in the United States, but the redistribution of wealth on Wall Street quickly forced them to change their plans.
E. Gerald Corrigan, the former president of the New York Fed who helped calm markets in the wake of the 1987 crash, offered conference participants a sobering assessment of the crises in Russia and Japan, essentially saying it would take years in most cases to fix the problems.
Others shared thoughts less publicly but conveyed a sense that the stock market had no real reason to go up given global uncertainties and weakening prospects for corporate profits.
John Lipsky, an economist at Chase Manhattan Bank, termed the confluence of world economic troubles ''the most disquieting'' he had ever seen, adding: ''One of the key reasons is that the international crisis management system is itself in crisis.''
It was not supposed to turn out this way.
Just a few years ago, market experts and policymakers saw a world in which capitalism had vanquished communism and free-market thinking would displace command-and-control economies. But resistance has set in. China is back in control of Hong Kong, and just last week the government stepped in to buy stocks and prop up prices in what was once one of the world's most free markets.
Japan, the wunderkind economy of the 1980s, seems incapable of rising from its late 1990s recession. Russia in the last few days is showing signs of that country's historic favoritism for state intervention in the economy.
Although Japan is by far the greater economic problem - Russia is a bit player on the world economic stage - it is the financial collapse in the former Soviet Union that seems to have really shaken Wall Street and Washington. That is because Russia still maintains a nuclear arsenal and is one of the world's largest producers of commodities such as oil and precious metals, the prices of which have reached lows not seen in decades.
If Russia is forced to export more of its commodities to earn foreign exchange to mend its finances, the pressure on other commodity-exporting nations will only intensify as prices for those goods are further depressed.
These developments are a long way from America's Main Street geographically, but not so economically or psychologically. Companies such as Coca-Cola Co. and Xerox Corp. depend heavily on markets overseas to sell their products. Falling oil prices worldwide hurt the earnings capabilities of companies such as Exxon Corp., still one of the largest employers and most widely held stocks in the United States.
One conviction underpinning U.S. stock prices throughout this bull market was the belief that American companies, more efficient in the wake of 1980s downsizing, would gain a large share of the emerging world's purchases of goods and services. That led to a frenzied buying of these stocks, which bid their prices up and forced companies to meet heightened profit expectations.
Among the biggest gainers also have been technology stocks. Partly that reflects the changing dynamics of the economy, one in which post-industrial products such as personal computers have supplanted old-fashioned items such as steel and glass. But technology companies also represent something else about the new economy: They are managed more loosely, their product cycles are much shorter, and their financial fortunes change more quickly.
All of that also helps make them among the market's most volatile stocks, which is both their allure and their liability. But as they become a greater part of the economy - Microsoft Corp. is the second-highest valued stock in the market - their volatility tends to exaggerate the overall volatility of the broader market. The Nasdaq index of stocks, heavily populated with high-tech companies, fell 2.77 percent Friday, about twice as much as the Dow did.
But tech stocks also are taking a beating because of the threat that the Asian economic crisis poses to technology companies. Not only is Asia a key market for companies such as International Business Machines Corp., but increasingly it is a competitor with goods that are now cheaper because of devaluations.
As the realization sets in that Intel Corp. will sell fewer chips in China, or that Boeing Co. will sell fewer airplanes to Singapore, investors see these companies as less valuable and are sending their stocks down to reflect a less sanguine outlook.
Many on Wall Street believe this process still has further to go. Some indication of just how much further can be derived by looking at the historical growth rate of corporate profits, which averaged about 6 percent for years before the bull market began.
From 1992 to 1997, however, profit growth ran nearly double that as companies restructured, merged with one another and enjoyed cheap credit. But the Commerce Department reported Friday that corporate profits suffered their first year-to-year decline in almost a decade during the second quarter of this year.
That decline can be attributed in part to slackening demand for goods from Asia, but also from domestic economic issues. With unemployment near historically low levels, companies need to pay more for workers, cutting into their profits.
Until a few weeks ago, strong consumer spending helped buoy the U.S. market even in the face of these head winds from Asia and elsewhere. Wages have been picking up, interest rates are extremely favorable, and consumers have felt the ''wealth effect'' of swollen stock market gains.
International Herald Tribune, August 31, 1998 |
