Stock Prices Drop Back to Basics

By David R. Francis, writer of The Christian Science Monitor | The Christian Science Monitor, August 27, 1990 | Go to article overview

Stock Prices Drop Back to Basics


David R. Francis, writer of The Christian Science Monitor, The Christian Science Monitor


THE stock market came close to "the riot point" last week.

That's how Warren Smith, editor of the Montreal-based Bank Credit Analyst described the plunge in United States stock prices. Sell orders were so prevalent Thursday that the New York Stock Exchange was unable to open trading on time in some popular stocks. Stock market "circuit breakers" - trading rules to prevent price declines from turning into uncontrolled panic - were imposed. But prices kept heading south.

Mr. Smith says investors - individual and institutional - are "getting out of control." On Friday, stocks enjoyed what analysts were calling a "technical rally." But for the week, the Dow Jones industrial average had sunk 111.88 points to 2,532.92. Other world markets were down as well.

What has happened, according to Smith and some other analysts, is that stock prices rose well beyond their "fundamental worth" this spring and summer. The Dow peaked at just over 3,020 in mid-July. Then the slowness of the economy became clearer. And Iraqi President Saddam Hussein ordered his troops into Kuwait, sending the price of oil soaring. Economists marked down their forecasts further, some seeing a recession ahead. Stock analysts began to suspect their earnings predictions for various corporations would be too optimistic.

"We could have further to go to get down to a reasonable price," says H. Bradlee Perry, chairman of David L. Babson & Co., an investment counseling firm in Cambridge, Mass.

Bank Credit Analyst (BCA), a Canadian research group whose reports are widely followed in the US as well as Canada, points out that a major recession has followed every big rise in the inflation-adjusted price of oil in this century.

"The most liquid source of money to pay for the additional oil bill will come from the world stock and bond markets," states a BCA publication. "Every dollar-a-barrel increase in the price of crude raises the global oil bill by roughly $25 billion; a $10 hike would push (extra costs) to $250 billion, which represents 2. …

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