Sell-Off Sparks New Fears of Recession
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
The stock market sold off sharply yesterday, surprising many by its swift reaction to the even steeper drop in China’s market.
Gyrations in the bond markets, a weakening dollar, and some cautionary remarks by a former chairman of the Federal Reserve, Alan Greenspan, added fuel to the fire, igniting the 415-point drop in the Dow.
To some, the fragility of the market came as no surprise. The head of Guerite Advisers, Hugh Moore, has been warning of a likely recession, and consequent market downturn, for many months. In comments made to the financial press yesterday, he reiterated his concerns.
Mainly, Mr. Moore has been increasingly worried about the massive liquidity in most markets, and related “extreme complacency” among investors. The high level of borrowing, with relatively little regard for credit risk, has worried many market observers, who have felt that any wobble in the credit markets could have widespread and sudden repercussions. Repeated indications that the sub-prime lending market is experiencing a graver downturn than originally thought have brought such a shakeout closer to the surface.
Specifically, higher than expected defaults in the so-called Alt-A markets appear to confirm fears of widespread weakness in that sector, causing a surge in 10-year treasury bond prices as investors ran to quality.
Mr. Moore has been focused as well on the likely downward revision of GDP numbers, due out today, which will probably show that fourth-quarter GDP rose only 2.0% to 2.5%, instead of the 3.4% figure first reported. Revised inventory levels (lower than originally reported) and a higher trade deficit are both expected to trim the end-ofyear growth estimate. The report, coming on the heels of concerns about a possible slowing in China and an implied fall-off in America, could spook investors anew.
These concerns are not new but have been largely ignored by investors focused on record levels of corporate profits, benign inflation figures, and, in recent weeks, improved government budget news.
It is worth taking a deep breath and remembering that the Chinese sell-off of 8.8% yesterday came on the heels of the Shanghai Composite hitting an all-time high the day before, and having more than doubled in the past year. Who can forget the extraordinary public offering of China’s Industrial and Commercial Bank, which raised $19.1 billion last October, the largest ever worldwide? The issue had orders for $500 billion, and had thousands of Chinese people lining up in the streets hoping for shares. The Chinese government raised concerns in local markets by raising the bank discount rate to 10% from 9.5%, and by attempting in recent weeks to cool stock market speculation. It is not so surprising that investors, many of whom are new to the game, would indulge in a round of profit taking.
It is also worth remembering that the Chinese government is widely expected to promote stability and prosperity in the months leading up to its debut on the world stage, which will take place when China hosts the Olympics in August 2008. Investors and businesspeople active in the country are convinced that the government will not allow anything to spoil the historic moment. That does not mean that their market may not be volatile, or indeed that a sell-off could not eat into recent gains, but it is highly unlikely that the government would embrace economic policies that would undermine their recent celebrated growth in any important way.
That our markets were so undermined by the drop overseas is a little surprising. However, Mr. Moore is not alone in his concerns about the shaky state of credit markets. Some diminished liquidity is almost a given going forward, which will doubtless cool growth. It could also cool the buoyant corporate takeover activity that has so delighted investors, as well as the high level of stock repurchases.
Still, recent figures showing a jump in January’s home sales and a rising level of consumer confidence were ignored yesterday. They reflect the underlying strength in the American economy. Mr. Greenspan said that as we are six years into a recovery, pressures are building that might ultimately lead to a recession. This is not a shocker. And there wasn’t a word about exuberance, irrational or the other kind.
