Black Monday redux 554-point loss: Plunge in Asian markets rattles already nervous U.S. investors despite lack of inflation and good corporate profits.

October 28, 1997

HISTORY DOES repeat itself. Ten years ago this month -- on "Black Monday" -- the Dow Jones average plunged a staggering 508 points. Yesterday, Black Monday returned to Wall Street, sending stocks down a record 554 points.

Time for concern? Absolutely. Time for panic? Absolutely not.

Given the market's sharp run-up in recent years, a major correction was inevitable. As Federal Reserve Chairman Alan Greenspan put it back in December, too many investors had a bad case of ''irrational exurberance,'' believing (wrongly) that what goes up would continue to go up -- and never go down.

The danger is that Wall Street's plunge in response to stock slides in Asia, particularly Hong Kong, may lead to renewed sell-offs on world stock exchanges. More down days may lie ahead before equilibrium returns.

Yet the plunge should be kept in perspective. Black Monday, 1997, amounted to a loss of 7.18 percent on the Dow; since Aug. 6, the average has dropped 13.3 percent. Compare that to Black Monday, 1987 when the one-day loss equaled 22.6 percent -- far more than we have experienced in the past 12 weeks.

Moreover, the U.S. economy remains strong. Low inflation, rising corporate profits, the lowest federal deficit in 23 years. Even the panic on Asian markets masks an underlying strength.

Two elements provoked Asia's stock market falls. First came an economic boom that raised optimism to unrealistic proportions. This led to building projects in Thailand and Malaysia for which tenants were not in sight.

The second element is unique to free-market Hong Kong, taken in by Communist China but with economic institutions intact, including the last Asian currency pegged to the U.S. dollar.

The Southeast Asian economic slowdown contributed to currency speculation against the Hong Kong dollar -- as previously against Thailand's baht, Indonesia's rupiah and Malaysia's ringgit. Hong Kong rulers put priority on defending the dollar, raising interest rates. That triggered the stock market slide.

American traders then reacted, worried by the close interdependence of U.S. corporations, especially in the volatile technology sector, with Asian countries. This spooked Wall Street.

Perhaps Black Monday II will have a salutory effect. Long-term trends point to continuing growth. But short-term trends, as reflected in the stock markets, are notoriously fickle. Investors should follow Mr. Greenspan's sage advice to lower expectations and look realistically at the ups and downs of our market economy.

Pub Date: 10/28/97

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