The stock market fell sharply Friday as the Indonesian currency plunge - and the sight of the country’s residents hoarding food in a Depression-like panic - renewed fear that Asia’s financial crisis will hurt the U.S. economy much more than previously thought.
Stocks also sold off after a better-than-expected U.S. jobs report convinced some investors that the Federal Reserve might not lower interest rates immediately. The government report showed the nation added 370,000 jobs last month to cap the strongest employment picture in 24 years.
The conflicting signs of a surging U.S. economy but faltering global markets have perplexed investors and policy makers. On one hand, the U.S. economy is enjoying vibrant job growth, moderate wage gains and virtually no inflation.
But fears are mounting that it’s only a matter of time before the deepening Asian financial turmoil infects the domestic economy and dramatically eats into U.S. corporate profits.
Those worries were behind the sell-off that sent the Dow Jones industrial average down 222.20 points, or 2.9 percent. It was the market’s biggest drop since it nose-dived 554 points, or 7.2 percent, on Oct. 27, and it punctuated a turbulent week in which tumbling foreign markets pushed the blue-chip index down 4.8 percent the biggest weekly drop since mid-October 1989. “It’s going from a financial crisis to, in some places, a financial collapse,” said Alan Skrainka, chief market strategist at Edward Jones & Co. in St. Louis. “When you see a Depression-style run on grocery stores in Indonesia, that’s the signal we’ve moved to a new phase of the crisis.” Because of the fear and uncertainty, many investors simply are pulling money out of stocks into safer havens such as short-term bonds.
The way the stock market has started the year doesn’t bode well for the rest of 1998. The performance of stocks in January traditionally has served as a barometer of their showing for the entire year, and the first five days has been a gauge of their strength for the month. Thus, many analysts think the stock market will be hard-pressed to maintain the unprecedented gains of the past three years, when the Dow industrials surged better than 20 percent each year.
Investors are focusing on the deteriorating situation in Indonesia, where stock and currency values have slumped amid worries that an economic aid package will fall apart because the Jakarta government has balked at implementing tough fiscal restraints. On Thursday, after the currency lost nearly one-fourth of its value in one day, thousands of the country’s panicked residents jammed grocery stores to stock up on food and President Clinton sent Deputy Treasury Secretary Lawrence Summers to meet with Indonesian President Suharto.
The Indonesian turmoil, which follows by only a few weeks a near-default by big South Korean companies, has erased hope a little more than a week ago that the worst of the Asian debacle had past. The International Monetary Fund and major governments have cobbled together aid packages to right the Asian economies. But the plans require stringent fiscal sacrifices that at best are likely to leave most Asian nations in, or close to, recession this year.
The Asian crisis hurts U.S. companies in two ways. Sagging Asian economies mean U.S. companies can sell fewer goods in the region. Also, suddenly weaker Asian currencies mean those countries can export cheaply priced goods into the United States, potentially forcing American companies to lower their prices.
Those worries have prompted talk lately about the possibility of deflation. That scenario could create a unique set of problems in the United States by shrinking corporate earnings and perhaps triggering job cuts as companies scramble to maintain their profit margins.
The talk of deflation was fed last week when Federal Reserve Chairman Alan Greenspan addressed the topic in a speech. On Thursday, Fed Governor Laurence Meyer said he doesn’t think significant deflation will occur, but he added that “a much larger spillover from the Asian crisis would encourage an easing” of credit.
As Asia’s financial crisis has worsened recently, Wall Street has come to expect the Fed to lower interest rates to spur the global economy and prevent deflation from taking hold. Investors still think the Fed will cut rates at some point. But the heavy job creation, despite the absence of inflationary pressure, may convince the central bank to hold off for the moment. Greenspan long has been known as an inflation hawk who has leaned toward raising rates at the first sign of rising prices.
With the stock market doing gyrations, a growing number of investors are heading for the safety of the bond market.
That pattern continued Friday when buying demand pushed the yield on the 30-year Treasury bond down to 5.73 percent from 5.74 percent on Thursday. Yields on shorter-term bonds fell by greater amounts. That’s a sign investors expect the Fed to lower interest rates at some point.
The dangers of deflation were in ample supply Friday.
Owens Corning, a maker of home-insulation products, said it will fire 2,200 people, close factories and report disappointing 1997 earnings. The company blamed competition that has forced down prices and wreaked havoc with its business.
A wide variety of commodity prices have been plunging to multiyear lows lately as demand from Asia has fallen off.
Overall, Wall Street increasingly is worried that projections about U.S corporate earnings this year are too high and likely to disappoint investors. That would be dangerous for a market still trading near all-time highs that has shown little tolerance for disappointment.
Garphic: Dow’s fall