International Markets: End of the American dream
Sunday 12 October 1997
Greenspan warned on Wednesday that stocks may be too high, measured against earnings prospects. Coming from the person credited with prolonging the US economic expansion and bull market beyond what many thought possible, the remarks hit investors hard.
Investors beat the Dow Jones Industrial Average down 1.6 per cent to 8,045.21 in the three days following Greenspan's comments.
Greenspan's suggestion that the economy must slow to prevent a burst of inflation damaged companies that prosper in higher-growth periods, including Aluminum Co. of America and United Technologies Corp.
Bond yields rose on expectations of faster inflation absent that economic cooling. Since Wednesday, the benchmark 30-year U.S. Treasury bond yield jumped 0.20 percentage point to 6.43 per cent. It was the worst three- day period for bonds since July 1996.
"Greenspan pretty much said [a rate increase] is coming," said Arthur Micheletti, chief investment strategist at Bailard Biehl & Kaiser. "The train is on the track, the light's in your face."
An unnamed associate of Greenspan said on Friday that investors who believe rates won't go up, or may go down, are "insanely disrespectful" of the economy's fundamentals.
A producer price report showing the biggest monthly jump in wholesale prices in almost two years compounded the market's woes on Friday. Conviction that the current mix of growth and low inflation is here to stay has been rattled.
The latest round of corporate earnings for the quarter ended last month could keep stocks from falling too far in the next couple of days. A host of banks, including Citicorp and JP. Morgan, and computer industry bellwether Intel are scheduled to report, along with more than 2,000 other companies.
If recent trends are any gauge, most of them won't disappoint investors.
Some investors see value in bonds at current yields. Thomas Donne, manager at Banc One Investment Advisors, bought 30-year Treasuries on Wednesday. "Fed policy will remain a question mark because the economy is slowing," Donne said. "I think bonds near 6.5 per cent are a pretty good deal."
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