Stock Shock Symbolizes Global Ties
World events hit Wall Street hard. As events this week suggest, stock markets are less isolated than ever.
This week's turmoil in stock markets from Bonn to Beijing reflects one of the basic truths of the late 20th century: World business and money markets are interconnected as never before.Skip to next paragraph
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A web of modern communications and cross-investments can now ripple economic problems - or progress - around the globe in a day. Investors realize and react to the fact that a slowdown in Thailand will affect Japan and China, which in turn can affect the fate of American corporations that sell to Asia and other parts of the world.
With the end of the cold war, this impersonal economic discipline has become one of the most powerful geopolitical forces facing national leaders. As this week's roller-coaster ride on the Dow Jones Industrial Average shows, the US is not immune, despite underlying strength of the American economy.
"In that sense, there are real 'fundamentals' involved here" that go beyond just the strength or weakness of the US stock market, says Michael Metz, chief strategist at Oppenheimer & Co., a New York investment company.
This doesn't mean that US stocks, and the tens of millions of average citizens who own them, are now completely at the mercy of foreign events. The US economy remains a powerful engine.
It does mean that events elsewhere can magnify the impact of domestic financial trends. Many analysts believe, for instance, that Monday's sell-off in the Dow was a market "correction" that was waiting to happen, and that stock troubles in Hong Kong and elsewhere were almost an excuse for the drop, as well as a cause.
Much of the selling in the US market was "psychological," says Philip Rettew, senior market technician at investment house Merrill Lynch, as institutional and professional investors sought to protect their profits so far this year.
On Oct. 27, the Dow Jones Industrial Average took its biggest one-day point drop ever. The 554-point plunge brought a 7 percent reduction in the index's value and two suspensions of trading by "circuit breaker" mechanisms adopted after the October 1987 crash.
Where next for US stocks?
The question around water coolers across the country now is: So where will the Dow end up? If nothing else, it appears the US stock market's long bull summer is over, replaced by an autumn of instability.
Mr. Rettew believes it will take the US market a week or so to settle, but he sees support for the Dow around 7200 and again at 6400. If the market did tumble to 6400, that would constitute a correction of slightly more than 20 percent, down from its peak of 8259.31 on Aug. 6.
A 20 percent downturn, while severe, would not be unusual in terms of market history. And several analysts, notably David Shulman, chief strategist at Salomon Brothers in New York, have forecast such a correction. But the market may not drop that far, Rettew says.
For its part, Standard & Poor's DRI, an economic consulting firm in Lexington, Mass., had recently calculated that stocks were overvalued by about 10 percent. The Oct. 27 plunge took the Dow back to where it should be, in terms of economic fundamentals, such as profit outlooks, says DRI economist Ezra Greenberg.