edit1

0

Hd — Market Mayhem

Well, it was bound to happen sooner or later. The market’s nose-dive last week came out of nowhere as most nose-dives do and left the media’s insufferable pundits pondering the inevitable: Why now? What does it mean? Are we in trouble? Is the sky falling?

Fortunately, much of Wall Street responded to the history-making sessions in less cataclysmic ways than those in search of The Big Story. In fact, the story wasn’t all that big even Monday’s 554-point drop, while alarmingly high at first glance, was, on a percentage basis, only about one-third as severe as Black Tuesday in 1987.

Last week’s turmoil did, however, underscore several realities:

First and foremost is how important the nation’s economy can be to the fundamental underpinnings of the global markets. When the Asian markets were coming apart at the seams, investors here took a deep breath and recognized, thankfully, that the U.S. economy is in good shape and that its continued vitality is likely to remain unaffected by the troubles afflicting Thailand, Malaysia, Indonesia and Hong Kong.

Especially unperturbed were individual investors, some of whom were bold enough to snap up blue chip issues that had become relative bargains by Tuesday morning. Their confidence in the markets reflects a general optimism about the economy, a point underscored again last week by Federal Reserve Chairman Alan Greenspan. To bet against those good times by bailing out of the equities markets defies logic.

Now the not-so-great news namely, the market’s circuit breaker mechanism, which needlessly halted trading on Oct. 27 and might, in fact, have done more harm than good.

The circuit breakers, which were adopted in the wake of the 1987 crash, call for trading to be halted when the Dow drops 350 points, and again if it falls 550 points. The idea is to give investors a chance to catch their breath and not be faced with panic-selling.

The problem is that these thresholds already raised once before because the Dow is so much higher today than it was in 1987 are still relatively low in context to a true market emergency. If the criteria were adjusted in proportion to where the Dow was in 1988, the 550-point trigger would be 1,400.

Some went so far as to suggest that the circuit breakers are intended less for investors and more for major Wall Street brokerages as a way of maintaining the flow of payments. At the least, even a short halt is bound to create investor anxiety not to mention negative perceptions overseas and should be executed only in the most extreme cases. Last week’s market action did not constitute such a case.

Arthur Levitt, chairman of the Securities and Exchange Commission, is among those recommending that circuit breakers be triggered based on a percentage drop, rather than a specific point drop. To us, it’s a sensible step. With so many markets around the world all reflected by different indexes it’s these percentage figures that are most relevant anyway.

Fortunately, cool heads overcame any panic connected to trading halts. Investors of all stripes are staying in the market though a little more aware of just how volatile the ups and downs can be.

No posts to display