Questions And Answers Concerning Stock Tumble
Q. Why did stock prices tumble on Wall Street Monday?
A. Partly because stock prices got too high relative to the profits of the underlying companies, the size of the economy and the returns investors ere getting from less risky investments such as government bonds.
Q. But that’s been true for months. Why is this happening now?
A. All markets usually overshoot on the way down just as they overshoot on the way up. It wouldn’t be surprising if stock prices fell by 20 percent before recovering.
Q. Does that mean it’s a good time to switch from stocks to bonds or money markets?
A. Not necessarily. Remember, you’ll have to pay broker commissions to sell stocks and then to buy them again later. And if the price of your stocks is still higher than what you paid for it, you’ll have to pay capital gains tax on the profit, unless your money is in a tax-exempt retirement fund. There’s also the problem of knowing when to get back into the market, which is every bit as tricky as when to get out.
For all those reasons, investment advisers usually tell individuals to avoid panic buying or selling.
Or think of it this way: despite a 1,100 point-drop in the Dow Jones industrial average since August, investors are no worse off than they were as recently as in May.
Q. So why was stock trading halted twice Monday?
A. After the 1987 stock market crash, government regulators decided it would be a good idea to give traders a “time out” or breather to reduce panic buying or selling on days when the market is unusually volatile.
Q. Does what’s happening on Wall Street have any impact on the rest of the economy - jobs, wages, profits, that sort of thing?
A. Actually, there are both positive and negative effects.
Q. What’s the bad news?
A. When the value of their stocks decline, consumers tend to pull back on spending a bit - about $30 for every $1,000 drop in wealth. For the economy as a whole, that means that if stock prices fall 15 percent and don’t recover, consumer spending will drop by $30 billion over the next 12 to 18 months. That would mean lower corporate profits, fewer new jobs and slow wage growth.
Q. And the good news?
A. As investors flee from stocks, many are putting their money into the much safer government bond market, where long-term interest rates are set. The effect has been to drive down rates on the 30-year Treasury bond from 6.7 percent in early September to 6.12 percent Monday. And lower rates tend to stimulate economic growth by encouraging new investment and reducing the interest costs consumers and companies have to make on their debt.
Q. So are we in for a recession?
A. Probably not. Taking all the various factors into consideration - fewer exports, reduced consumer spending, lower interest rates - forecasters were saying Monday that the growth rate of the U.S. economy could slow by as much as three-quarters of 1 percentage point over the next year.
But with the economy now expanding at the annual rate of more than 3 percent, that still leaves a growth rate of 2 percent to 2.5 percent, which is actually closer to the level most economists and Federal Reserve policymakers consider healthy. xxxx HOW STOCKS OF LOCAL INTEREST HAVE FARED Here is a look at how Monday’s market plunge affected some stocks of local interest compared with their closes of last month and one year ago.
Oct. 25, 1996 Sept. 26, 1997 Oct. 27,1997 Alaska Airlines 21-7/8 31-1/2 31 Albertsons 34-7/8 34-7/16 36-1/4 Boeing 31-3/8 54-1/4 43 Boise Cascade 31-3/8 41 37-1/4 Coeur d’Alene Mines 14-1/8 14-9/16 10-15/16 Eagle Hardware 28-1/2 19-3/4 17-1/8 Egghead Computer 6-1/8 8-9/16 8-1/4 Hecla Mines 6 5-1/2 5-5/16 Hewlett Packard 44-7/8 61-9/16 59-1/2 Itron 16-1/4 24-7/8 19-1/2 Kaiser Aluminum 11-1/2 13-7/8 12-9/16 Key Tronic 8-3/8 5-3/8 4-1/4 Microsoft 136-5/8 132-3/4 128-7/8 Nordstrom 38-3/4 64-1/4 54-1/4 Pegasus Gold 10-3/4 4-7/8 4-1/8 Plum Creek 26-3/4 34-1/4 29-1/2 Potlatch 40-1/2 49-1/2 47-13/16 Starbucks 36-1/4 41-3/8 35-1/8 Sterling Financial 14 18-3/4 20-1/2 Sunsine Mines 1-3/16 7/8 7/8 U S West 29-1/2 36-7/16 38-9/16 Washington Mutual 36-7/16 68-13/16 65 WWP 19 19-15/16 19-3/4