IU Kelley School experts available to discuss today's sharp decline in the Dow and its causes
FOR IMMEDIATE RELEASE
Aug. 18, 2011
BLOOMINGTON, Ind. -- Anxiety returned to stock markets today (Aug. 18) due to renewed concerns about the U.S. and global economies and led initially to a 534-point drop in the Dow Jones industrial average, before it closed only down by 420 points, or a 3.7 percent decline. Four experts from Indiana University's Kelley School of Business offer their perspectives and are available to speak with reporters.
Robert Jennings, the Gregg T. and Judith A. Summerville Professor of Finance, said that while general confidence about the U.S. economy has been low, "you're still comparing new data to expectations . . . Yes, the economy is weak, but you might expect a particular level of economic activity. Should several new data points suggest that economic activity is not living up to even reduced expectations, the revision downward could be substantial." Many indications of economic weakness worldwide sent Wall Street sharply lower today (Aug. 18), following similar declines in Asian and European markets, as well as unexpected lower-than-anticipated reports on existing home purchases and unemployment. "I think it's a matter of uncertainty and the market doesn't like uncertainty," Jennings said. "You get additional 'not-good' to bad news, and people simply are headed for the exits."
He noted that mutual funds flows are very strongly negative for stocks, as with retail and institutional buyers. On days last week when the market recovered, institutional investors were said to be selling stocks to retail, or individual, investors. "If the retail folks are selling, then there might not be very many people left around to buy," Jennings said. "All the news seems to be coming in on the negative side, people were already very uncertain. They really cling to the most recent news a lot and use that to update their beliefs about where we are going . . . You're getting accumulation of more and more data points that are on the negative side. All of a sudden that becomes everyone's new reality." Up to this point, he has not seen any economic reports that suggest more than a 50-percent risk of a double-dip recession, but perhaps that too will change (Morgan Stanley today suggested that the U.S. and Europe may be "dangerously close to a recession.") Jennings can be reached at 812-855-2696 or jennings@indiana.edu.
Charles Trzcinka, the James and Virginia Cozad Professor of Finance, noted that it's almost as if the market is following a pack mentality and that the difference in cash flow for firms matters much less than what the macroeconomy is doing and what governments are doing in response. "It's as if there is only one stock traded in the U.S. markets and all the guesswork is about how the United States and European macro-economies will do over the next year to 18 months and what governments will do in response," he said. "Individual stock analysis seems almost useless in this market." Trzcinka can be reached at 812-855-9908 or ctrzcink@indiana.edu.
Andreas Hauskrecht, clinical associate professor of business economics and public policy, said, "What we currently observe is irrational market behavior . . . For me this is a mixture of noise trading and the trading impact of institutionals such hedge funds. Negative growth forecasts can't explain such a stock market pricing, as corporates sit on piles of cash and the cash flows are not bad at all. The debt overhang is real, but entirely different from the last financial crisis. Lehman Brothers caused all the known problems because structured, non-traded financial products became the value problem." He said the European debt crisis was anticipated one and half years ago and is a slow-motion crisis. "Financial institutions have had a long time to reduce their exposure," he said, using Greece as an example. "The U.S. has not a debt crisis, but a political problem, being unable to increase revenues and decrease structural spending. The world will not go under. Not yet." Hauskrecht can be reached at 812-855-2784 or ahauskre@indiana.edu.
Sreenivas Kamma, chairperson of the Finance Department and an associate professor of finance, said that a key problem in both Europe and the United States is debt overhang. "Governments are behaving like ostriches, burying their heads in the sand and refusing to see the problem," he said. "Clearly, governments and more so, institutions, are behaving like addicts - engaging in behavior aimed solely at feeding the addiction." He cited as an example the proposed, jointly-sold Eurobonds. In late July, the European Union decided to empower the 440 billion-euro European Financial Stability Facility to buy bonds in the secondary market, grant precautionary credits and recapitalize banks across the continent. Each EU government still needs to approve the proposal. "The metaphor being used all along by every commentator is revealing: bullets," he said. "It's as if a magic bullet will make the pain vanish overnight." Kamma can be reached at 812-855-3384 or kamma@indiana.edu.
