Taking Stock of a Wild Week : Big Numbers, Yes--but a Big Deal?

You should be feeling roughly 3% to 5% poorer than you were last Sunday. But you are totally forgiven if you haven’t noticed.

That’s the range of what the average U.S. stock portfolio lost in last week’s market slump, which saw the Dow Jones industrials plummet a record 554.26 points on Monday, resurge 337.17 points on Tuesday, and bounce around the rest of the week, to close Friday at 7,442.08.

Lots of big numbers. But for the week, the Dow’s net loss was 3.5%--probably not enough to cause a decline in consumer spending at the malls this weekend, either by professional mutual fund managers or by the millions of people whose savings are entrusted to those managers.

While last week will go into the record books for a number of reasons (biggest one-day Dow point loss, heaviest stock trading volume ever, first use of New York Stock Exchange trading halts), by Friday there were plenty of people on Wall Street and Main Street asking the same question: What was the point? What, if anything, was the market trying to tell us?

Was the mini-crash an attempt to wring “excesses” out of the market? Maybe that occurred in Brazil, where the main stock index plunged 22% for the week. But the U.S. Standard & Poor’s 500 index, the broad measure of blue-chip shares, was off just 2.9% for the week, and is down a relatively modest 7% from its record high reached Oct. 7.

In other words, if you thought U.S. stocks were richly valued a month or so ago at their peaks, not that much has changed in the market overall.

Indeed, year-to-date, most investors in U.S. stocks still are sitting on heady gains, even after last week: The average U.S. stock fund is up 20% for the year.

Was last week supposed to be a test of small investors’ ability to avoid panicking in market tumbles? If so, the vast majority of people got good grades.

Brokerage Charles Schwab & Co. randomly surveyed 500 of its clients late Tuesday--the day of the big rebound--to find out what they were doing. Only one in eight had traded either on Monday or Tuesday. Of Schwab clients who buy mutual funds through the firm, one-third said they planned “minor modifications” to their portfolios in the wake of the market tumult--and nearly two-thirds of those people said they planned to buy more funds.

In fact, some mutual fund companies complained

that the real culprits in Monday’s selling weren’t individual investors, but rather the financial planners and other professional advisors who manage individual clients’ mutual fund portfolios through Schwab and other fund supermarkets.

“They tell their clients, ‘The risk of managing money yourself is that you’ll panic’ [in market sell-offs], but we saw them selling across the board,” said a spokeswoman for one no-load mutual fund company, who asked for anonymity.

If last week was a test for the New York Stock Exchange and the Nasdaq Stock Market, they, too, pretty much passed. Given the overwhelming trading volume, it was inevitable that some investors would have trouble getting through on the phones and that some orders would be delayed. But considering that the NYSE traded 1.2 billion shares Tuesday--nearly twice the previous record--the system clearly was ready.

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Perhaps the most important thing learned last week was that the so-called circuit breakers installed by the NYSE (and copied by other U.S. markets) are a dumb idea. Halting trading for half an hour when the Dow falls 350 points, and one hour when if falls 550 points, may have given some traders time to breathe, but it clearly got in the way of some investors’ desire to execute transactions.

What’s more, it looked suspiciously as if some investors accelerated their selling before the halts, making things worse, precisely because they knew the halts would kick in and freeze them out.

Yes, it’s true that Chicago commodity markets basically halt trading when certain commodities rise, or fall, by a preset daily limit. But stocks aren’t supposed to be commodities, are they? Capital markets are supposed to be free-moving. Thankfully, by the end of the week, most of the concerned parties, including the NYSE, the Securities and Exchange Commission and the Treasury Department, promised that the circuit breakers would be reviewed.

Two other thoughts about last week’s market action:

* There is a significant chance that the U.S. market’s pullback, and those in Europe and Latin America, amounted to nothing more than a garden-variety “correction”--the kind which, before the 1990s, used to occur with some frequency within bull markets (and were buying opportunities).

The deepest fear on Wall Street is that the markets might be telegraphing something more onerous: that the world is on the verge of a major deflationary cycle, where prices for goods and services plunge because of overproduction--especially from Asia, which triggered this mess with its currency devaluations and weakened economies.

If serious deflation were to become reality worldwide, it could naturally be devastating for stock prices because corporate earnings could implode as companies staged a “race to the bottom,” slashing prices to compete.

But for now, most pros don’t see that nightmare playing out. The U.S. economy, and the European economy, still mostly depend on internal consumption. Imports from elsewhere can bring price deflation to us, but trade overall accounts for just one-fifth of U.S. gross domestic product.

What’s more, Jeffrey Applegate, investment strategist at Lehman Bros., notes that the U.S. economy in particular is services-dominated, not goods-dominated. And as most of us can attest, prices for services (haircuts, car washes, computer programming, etc.) are “sticky”--their rate of increase can be slowed, but it’s tough to bring them down.

Worried about deflation? If it’s coming, we should get a clear signal well in advance: You can expect U.S. Treasury bond yields to plunge if the smart-money players really see deflation breaking out.

* Rao Chalasani, analyst at Everen Securities in Chicago, raises an interesting idea. In 1987, stock markets crashed worldwide, including in Japan. But that just set the stage for the “bubble” phase of the Japanese market in 1988 and 1989, as money poured back in.

Why? Japan was the model economy of that era--everybody wanted to own a piece of it. Today, the model economy is the United States. If stock prices were to fall further in coming weeks worldwide, could that be a setup for a rocketing U.S. market in 1998?

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Japan, Late-80s; U.S., Late-90s?

The Japanese stock market crashed with the rest of global equity markets in late-1987. But in part because Japan was the “model economy” of that era, the Japanese market’s recovery was swift--and in fact, stock prices nearly doubled from their post-crash lows in 1987 to their all-time peak in December, 1989. With the United States the world’s “model economy” today, could the U.S. stock market be poised to do something similar? Nikkei-225 stock index, monthly closes:

1987: 20,048.35

1989: 38,915.87

Source: Bloomberg News

Scorecard for the Week that Was

Changes in key stock indexes and other market indicators last week, and where they stand year to date:

U.S. STOCK INDEXES

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Item Fri. close Change for week Year-to-date change S&P; 500 914.62 -2.9% +23.5% Russell 2,000 433.26 -3.2% +19.5% Dow industrials 7,442.08 -3.5% +15.4% Nasdaq composite 1,593.61 -3.5% +23.4%

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FOREIGN STOCK INDEXES

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Item Fri. close Change for week Year-to-date change Britain (FTSE 100) 4,842.30 -2.6% +17.6% Malaysia (composite) 664.69 -4.0% -46.3% Hong Kong (Hang Seng) 10,623.78 -4.7% -21.0% Japan (Nikkei-225) 16,458.94 -5.2% -15.0% Mexico (Bolsa) 4,647.84 -5.5% +38.3% Germany (DAX) 3,726.69 -8.0% +30.3% Brazil (Bovespa) 8,986.00 -22.2% +27.7%

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OTHER INDICATORS

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Item Fri. close Change for week Year-to-date change Dollar in yen 120.40 -1.2% +3.7% Dollar in German marks 1.726 -2.7% +10.9% Dollar in Mexican pesos 8.37 +6.4% +6.6% Dollar in Thai baht 41.10 +8.2% +60.0% 30-year T-bond yield 6.15% -0.12 pts. -0.49 pts.

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Note: Foreign stock index changes in native currencies. Source: Bloomberg News