Nation/World


As Stocks Stabilize, Market Analysts Continue To Be On Guard Experts Say Brokers, Investors Shouldn’t Underestimate The Situation

Even as they counsel calm in the midst of the turmoil sweeping through stock markets around the world, many analysts also warn against underestimating the situation.

After U.S. stock prices tumbled Monday and rebounded Tuesday, brokers and investors seemed hopeful that Wall Street was faced with nothing more than a “correction,” however violent, from its recent record highs.

The financial troubles in Hong Kong and other Asian economies, it was said, gave edgy investors on this side of the Pacific a handy excuse to cash out some of their gains from a mighty bull market that had reached unsustainably high levels.

The producing and consuming economy in this country, meanwhile, still steamed along at a good growth rate. Some even saw the market drop as a favorable portent for continued low inflation and further declines in interest rates, lessening the likelihood of any near-term credit-tightening by the Federal Reserve.

But there was a darker suspicion that couldn’t be ignored altogether: Did the markets, reflecting the collective judgments of millions of investors the world over, perceive an impending threat to prosperity that wasn’t yet discernible to the individual eye?

After all, during the granddaddy of all market crashes in 1929, frequent official pronouncements were issued that “conditions are fundamentally sound.”

Barton Biggs, global investment strategist at Morgan Stanley, Dean Witter, Discover Co., said he returned from a mid-October trip to Asia disappointed in what he had found.

“What really bothers me is certain Asian governments’ inability or unwillingness to make the tough decisions that are absolutely essential to clear the markets and get their economies on the road to recovery,” Biggs wrote in a bulletin to the firm’s clients.

“The governments still believe they are in a passing storm not of their own making caused by the currency speculators.”

In a world of closely interdependent economies, the question always arises whether an economic ailment in one area might infect everybody else by disrupting trade, flows of investment funds and business expansion plans.

Nevertheless, many participants in the U.S. markets professed to see the recent setback as a healthy development on balance.

“For two years we’ve been having a hard time finding cheap stocks,” said Ed Walczak, portfolio manager of the Vontobel U.S. Value Fund in New York, who said he used a big chunk of the 30 percent cash reserve that had built up in his fund to buy a wide range of stocks Monday and Tuesday.

Asian economic woes, he said, “will have a real impact in some areas. But the names we’re buying are only marginally affected, or not at all.”

Regardless of what event served as the catalyst, many observers argue that the bull market, in U.S. as well as foreign stocks, was long overdue to cool down.

“After three extremely strong years for the stock market, we shouldn’t be surprised by a year of worse than 20 percent to 30 percent gains,” says Greg Smith at Prudential Securities.

“The long-term bull market story is still very much intact. Money flows into the stock market are still robust, inflation is still down, and companies will continue to make themselves more efficient and ultimately more productive.”

But Smith adds, “There’s nothing in the long-term story that prohibits a difficult quarter or even a difficult year.

“Investor expectations are set so high that even slightly disappointing news can send markets into a tailspin. That behavior is a classic warning sign of a financial market running out of steam.”



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