Because every effect is supposed to have a cause, people attributed Friday’s decline to yet another Gloomy Gus speech by Fed Chairman Alan Greenspan and a 1.1 percent September increase in the producer price index that raised the prospect of inflation. The PPI’s increase was the highest monthly move in nine years, as analysts intoned with great portent. But both those things seem to be justifications to dump stocks rather than causes.
Let’s start with Greenspan, who is second only to Mammon in Wall Street’s pantheon of financial gods. Greenspan didn’t say anything he hasn’t said plenty of times before. In a speech to bank regulators, Greenspan focused on the “equity premium” that stock investors demand because stocks are riskier than Treasury bonds. He warned the premium may widen. To me, the speech seemed more like an oblique attack on the new Dow 36,000 book by James Glassman and Kevin Hassett than a statement of Fed policy. They argue–wrongly I think–that stocks are no riskier than bonds, and the risk premium will disappear. David Jones, chief economist at Aubrey Lanston, says Greenspan “was just trying to tell people not to get too carried away with extreme optimism.”
The producer price index was skewed by higher cigarette prices, imposed to pay for the tobacco settlement, that accounted for two thirds of the 1.1 percent increase. Much of the rest came from car prices. It hardly seems worth getting excited over.
But the market freaked. S&P 500 futures, traded before the New York Stock Exchange opened, fell 20 points (the equivalent of about 160 Dow points) because of Greenspan’s speech, recovered half the loss, then tanked to minus 30 before when the producer price index news broke. The S&P closed down 36 points (2.8 percent) for the day.
The investors who move the market are obviously very nervous–and, in my humble opinion, have every right to feel that way. For years, everything had been perfect for the U.S. economy and the U.S. stock market. Inflation was nonexistent, interest rates were stable and low, Europe and Japan were mired in slumps, the Asian collapse of 1997 helped keep U.S. prices low because desperate Asian businesses sold stuff here at any price in order to get dollars to pay their debts. But Europe is recovering, Asia seems to have recovered and Japan may be recovering. Long-term Treasury-bond yields have been rising for a year–from about 4.7 percent last October to 6.2 percent now. I’ll bet that some very big money is starting to move out of U.S. stock and bond markets into European, Asian and Japanese markets. Which could help explain why the dollar has been falling relative to the yen and the euro.
If you’re an optimist, you’d say that despite last week’s carnage, the Dow was up 9.1 percent for the year through Friday. And that if you project that return for the rest of 1999, the Dow would show a gain of 11.5 percent, close to its historical average. But if you’re a pessimist–or a realist–you’d say that the S&P 500, a far broader market indicator, is up a crummy 1.5 percent for the year. And that most of its stocks are down for the year, with the index itself marginally ahead only because of a handful of big-capitalization stocks like Microsoft.
OK. This is the point where form dictates that I tell you where the market is headed. Unfortunately, I haven’t the slightest idea. As witness the fact that for the past few weeks, I’ve been putting some of my cash reserves into the market, and so far I’ve gotten stomped. I do know two things, though. The first is that worrying about whether the market has seen a “selling climax” is a waste of time, not to mention being borderline obscene. Who knows? Who can possibly know? And the second is that it’s probably a pretty shrewd bet to buy Dow 10,000 caps. If stocks turn around and head straight up, the caps will be good for a laugh. And if the market goes down and stays down, you can peddle them as nostalgia items.
