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Commentary

 
THE EVENT

A Brief Comment on Contemporary Market Dynamics

 

Memorable!!

It was a week not to be forgotten. Following nearly a months-long turbulently uneasy market, prices of shares dropped precipitously Friday. This was most noteworthy among the shares that had earlier lead the market upward. Commonly used indexes show the following drops for the week: 32% for the Street .com Internet index, 25% for the Amex Bio-Tech index, 25% for the Nasdaq, 10% for the S&P 500, and 7% for the Dow Jones, while government bonds moved a tad higher.
 

NEW FORCES
CREATED BY
THE SPEED
OF CHANGE

The speed of such changes creates new forces and factors — some spontaneously kinetic, others take longer to play out — that do not allow complacent, or convincing, analysis. There was already abundant evidence that the market would be required someday to purge itself of fanciful prices, and of unbridled gamy investment practices. Proceeding to do this so suddenly might prove to have been fortunately timed, for this happened while the American economy was still strong, world currency and interest rate circumstances were rather orderly, and the surrounding support of adequate liquidity and sanguinity seems too abundant to be quickly blown away. To the extent that the pain of change is suffered now, there would seem to be less to cope with later on. Correspondingly, our concerns of possible financial breakdown are lessened.
   

EXCESSIVE
RESPONSE TO
OVERSTATED
INFLATIONARY
FORCES

Friday’s emotional response to the Government’s release of the consumer price index was conditioned, no doubt, by Federal Reserve Chairman Greenspan’s having been seen on television recurrently for days expressing concerns over the prospects that inflation might soon spring from excessive product demands. Consumer buying (boosted by the wealth effect of higher prices of financial assets) might expand beyond America’s productive capacity and the combined ability and willingness to import goods, or so he recurrently surmised. According to our perceptions, the facts give little support for these concerns. Most of the price increases just reported were attributable to the cost-push-forward effects of higher oil prices — a politically contrived price rather than a market determined price. Also, there were higher allowances for health care costs, and several one time or superficial factors, all of which have relatively little correlation to monetary policies.
   
WEALTH EFFECT
DEFLATED
Last week’s market would seem to have taken care of much of Mr. Greenspan’s concerns. At least that would seem to be the case, considering also the combined pain of this month’s tax payments swelled by the capital gains realized out of a rising market in recent years. Further increases in interest rates in nearby weeks seem to be inappropriate.
   
A PERVASIVE
CHANGE OF
CIRCUMSTANCES
In other ways the changes of the stock market have imposed upon matters beyond the market itself. Terms for obtaining equity capital by businesses have dramatically worsened, causing postponements (or eventual cancellations) of share issuances. Enterprises involved in new technologies and in the bio-sciences are obviously the most affected. Uncertainty has become a cautionary factor in planning for nearly all entities.
   
A SANER,
SAFER WORLD
One might say the market insanely rushed into a more sane composition of value relationships and expectations. We had hoped for an infusion of reality, but thought it would be deferred still longer owing to the abundance of liquidity and the optimism backed by the self-assurance of generations who have not seen a bear market, or a significant economic contraction. We can not confidently say we have just experienced a sea change. Rather, it seems more comparable to say the storm has passed, the damage is sobering, and the landscape is altered. However, the disposition to grow and the elements of strength and vigor survive, cautioned (but not subdued) by the experience of recent days.

 

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