Washington, 28 August 1998 (RFE/RL) -- American financial commentators were all saying the deteriorating situation in Russia was behind the huge fall in prices on U.S. stock exchanges on Thursday.
The Dow Jones Industrial averages of 30 major stocks traded on the New York stock exchange fell 357 points, the third largest point drop in history. It represented a more than four percent decline in prices. The American, NASDAQ and other exchanges also recorded major declines. And in every case, commentators said the downward spiral was driven by fears over Russia's rapidly declining financial situation.
But a number of experts and securities analysts said the Russian effect was only psychological since the size of the Russian economy is small in the global context and not well connected to it yet.
Joe Battipeglia, an official of Gruntal investments in New York said Russia is actually "an isolated situation that is mainly political." While German banks have been left with some serious losses, he said, they are protected by government guarantees and their long-term profitability will not be significantly affected.
U.S. banks have had some losses in Russia as well, he said, but not to the extent of being a serious problem. Republic Bank in New York, for example, said it was taking a 250 million dollar write-off -- thereby canceling all of the bank's profit this quarter -- to account for the forced rescheduling of Russian debt. But that is not considered a serious difficulty.
William Fleckenstein, the head of the Fleckenstein Capital investing firm in Seattle, Washington, disagrees. He told financial television interviewers in the U.S. Thursday that Russia is important because it is "part of a pattern" in emerging market and developing nations. Fleckenstein agreed that Russia is still not a major part of the global economy, but serves to remind investors that developing markets in Asia, Latin America and the former Soviet Union are still volatile and uncertain investment zones.
Much of the downward pressure on U.S. stock prices came from investors selling shares so as to move their money into U.S. treasury instruments, the traditional "safe-haven" for investors when the global environment becomes turbulent.
That rush of money into treasury bills and bonds pushed prices up to near 30 year record levels and that forced returns -- the interest to be paid -- to record lows of just over five percent. In bonds, the higher the price to buy, the lower the return.
Generally, stock analysts have long expected a downward drop in average prices known as a correction. Stock prices have been rising almost steadily for four years and many have said they were getting too high compared to the underlying earnings and value of the companies issuing the shares.
Despite all the "expert" opinion and commentary, of course, there is no way to predict how far down stock prices might fall, how long the decline might last, or what fears and concerns prompt investors to buy or sell. Even such successful investors as George Soros admit they must often guess at what will happen and they are as often wrong as right.
But historically, even after major crashes, stock prices have tended over time to continue on an upward track.