Selling this economy short is not a very wise investment decision - editorial

Nation's Business, Oct, 1988

Selling This Economy Short Is Not A Very Wise Investment Decision A year ago this month an economic Armageddon seemed imminent. The Dow Jones Industrial Average had plunged 508 points in a single session, and most of the media coveraged proclaimed, "The end is at hand."

"Fear and panic of historic proportions overwhelmed the stock market," one major newspaper reported. A top official at a leading brokerage house said, "What we have is and economic crisis of international proportions." A prominent economist declared, "Today is the start of a recession."

There's no doubt that the heavy losses in stock values had tragic consequences for many investors, and the impact on the lives and plans of those individuals was very real. But there has been no depression, no recession, no international economic crisis. Fears that the market would continue its free-fall were not realized. The economic recovery that started in November, 1982, remained strong and will be 6 years old next month. Employment is at a record high both in absolute numbers and in the percentage of the adult population holding jobs. The nation's manufacturing industries, the subject of wide-spread obituary notices in recent years, have grown substantially stronger in the past year. Overall corporate earnings are healthy.

Such developments traditionally flash "buy" signals. But, although the Dow Jones average has generally remained above the 2,000 level, compared with the 1,738.74 level it reached October 19 of last year, the market has shown few signs of the exuberance of the first eight months of 1987.

The trauma of the market plunge is obviously a major factor in the unwillingness of investors to return to the market in large numbers. Many worry about another major fallout.

But there is another, highly ironic ingredient in the recent drift on Wall Street. Development that once would have sent the market soaring now send it down.

When unemployment falls, the market reacts adversely from fear that labor shortages will trigger inflationary wage increases. (Conversely, the market soared 52 points in early September on a report that unemployment had inched up.) The Federal Reserve Board tightens credit because it thinks the economy is expanding too fast, and the market drops because investors worry about higher interest rates.

Reports of healthy corporate earnings, traditionally prime movers in investor activity, have been largely ignored as the bad news is allowed to dominate.

But the widespread predictions of imminent economic disaster heard a year ago have long since faded. There are signs that investors might be getting ready to return to the market in increasingly significant numbers. Individual and institutional investors will, of course, decide for themselves what is the best time to re-enter the market.

But this first anniversary of the events of October 19, 1987, offers an opportunity to reflect that it's not a very wise investment decision to sell short an economy that has shown the strength and durability of the one this country has enjoyed for the past six years.