For worried American investors, the real clue to what was coming for stocks Monday wasn't hidden in a company balance sheet or even the latest figures on the U.S. economy. Rather, it was to be found across the Pacific Ocean, in the panicky markets of Japan and Hong Kong.
Stocks there were taking yet another severe beating. And, as sunrise spread across Europe and England to the United States, so did this latest market plunge.
The action underscored a striking reality about today's financial crisis, one for which the past offers no clear guidepost: Nations have become linked in a single, interdependent financial community in which events on one continent cause fortunes to rise and fall--with numbing speed--on another.
Element of the Unknown
This linkage has revolutionized investment practices in the 1980s and added a strong element of the unknown to today's troubled climate: "Instead of having four or five separate, prominent stock exchanges around the world, it's like there is one stock exchange--with four or five branches," said Barbara S. Thomas, a senior vice president of Bankers Trust, a New York bank holding company, and former member of the Securities and Exchange Commission.
Monday's events dramatized the point: After a weeklong shutdown to ease nerves, the Hong Kong exchange opened to a startling drop of one-third of its stocks' value. Other, much larger stock markets seemed to dive in unison: Tokyo fell 6%, London 7%, Frankfurt 10% and New York 8%, according to the Institute for International Economics.
(Prices stabilized on the Tokyo Stock Exchange in early trading today but continued downward in Hong Kong. Tokyo's 225-share Nikkei stock average ended today's morning session up 75.60 points, or 0.3%, at 22,278.16. On the Hong Kong Stock Exchange, the prime gauge of blue chips, the Hang Seng index, was off more than 5% to 2,118 within 40 minutes of morning trading.)
The connections between countries are financial, as individuals and big institutions have markedly hiked investment in other countries in recent years. They are also economic, as the U.S. budget and trade deficits affect other countries--just as the policies of other countries affect those deficits. And they are psychological, with panic or exuberance in the markets of one nation hopscotching oceans, almost routinely.
"It's still a world of people, and people never change," said A. C. Moore, director of research for Argus Research Corp. in New York. "People have fear. People have greed. The potential for those responses in the market is always present."
Technology has given traders the ability to follow stocks in markets throughout the world, with virtually no interruption, and to communicate with their own foreign offices instantly. Further, traders can shift money electronically with enormous speed.
At the same time, individuals and institutions in one country are increasingly inclined to invest outside their national boundaries, a development of the last few years that has been simplified by the changing technology and increasingly easy access to stock exchanges.
Thus, investors know immediately of changes in a stock's value, even if the stock is in another nation. For instance, if IBM drops on the New York Stock Exchange, that places immediate downward pressure on the stock in Tokyo, where it is also listed.
"There is no such thing as a local market anymore," Thomas said.
Indeed, the notion of keeping a "diversified" portfolio, long a watchword for careful investors, has taken on a whole new meaning. "An investor doesn't just hold the stocks from one country," said Michael J. Moran, chief economist at Daiwa Securities America in New York. "They have global, worldwide holdings, and they switch back and forth very easily."
"Ten years ago, there wasn't any foreign investment to speak of by (U.S.) pension funds," said Lawrence E. Davanzo, in charge of pension consulting for Wilshire Associates in Santa Monica. "Now it's very, very commonplace."
Davanzo said that many U.S. pension funds now invest between 5% and 10% of their assets in foreign stocks and bonds and that a "conservative" estimate of this foreign investment by such funds would be $50 billion. "When I visit money managers in London, they've got a group of people who do nothing but look at the American markets. In Tokyo, it's the same thing," Davanzo said.
Such international financial connections are mirrored in the fortunes of national economies. The U.S. budget deficit has for years required the nation to borrow from other countries--by selling them Treasury bonds--and this has placed a continued upward pressure on U.S. interest rates, so that the Japanese and others will find such bond purchases attractive.
This means that a fall of the Japanese stock market, with a decline of wealth there, has troublesome implications for such foreign investment, both in the form of industrial ventures in the United States and also for financing the U.S. deficit.