At 10.46 a.m. in New York last Tuesday, the market finally turned. The Dow Jones had slipped below the 7000 level and investors started to sniff a bargain. Buyers rushed back into the market, with technology stocks the main target of what became an extraordinary buying frenzy which resulted in the New York market notching up record volumes of over a billion shares and the Dow notch a record oneday points gain. But since then the market has appeared to search for direction.
And the question now is: has the past week been a momentary pause for breath in what is still a bull market or was it a signal of a progressive decline in stock markets?
Views on that differ widely, but all the evidence of the past suggests that after stock markets suffer near double-digit collapse, they then go into a period of severe instability lasting months, before they finally settle into a steady trading pattern.
Nerves will be on edge for quite some time after the events of this week. Although on Wednesday, collective sighs of relief were breathed all around the financial world, and other stock markets dutifully took their cue from Wall Street and sent share prices spiralling upwards. Hong Kong, after collapsing 14 per cent on Monday, recovered 19 per cent on Tuesday and the stock market sages adopted the view that the worst of this particular market bloodbath was over.
But uncertainty remains. And events in the Far East could continue to trigger instability, although many analysts argue that markets in the West should pay less attention to the Tiger economies. Those in the markets looking for a scapegoat for this latest turmoil focused their attentions on financial speculators, who finally targeted their attentions on the Hong Kong dollar, after picking off virtually every other currency in the far East which had a fixed link with the US dollar.
The Hong Kong government took the view that the speculators could be fought off but at what price?
Hong Kong's reputation as a bastion of financial stability took an almighty battering, with many in the markets taking the view that any aspiring "tiger economy" whose stock market can drift 33 per cent in two day's trading is best left avoided. The falls in Hong Kong sparked fears of a wider financial crisis in Asia which would also hit the West. But so far such fears have lacked focus. And on international markets, traders and analysts competed with one another to come up with the best soundbite to describe what has been an extraordinary week.
"Controlled frenzy", commented one unnamed dealer in Frankfurt. There seemed little control in the frenzy that sent the DAX index of the 30 top German shares down 13 per cent in one session before sanity prevailed and the German market recovered some of its poise.
"This is a case of where you should sell until you can sleep," said a certain Mr John Mangun of IB Gimenez Securities in Manila. Mr Mangun's clients will no doubt be thanking him for that advice delivered just before the Manila market rebounded in line with the rest of the market in the Far East.
Mr Mike Grimble, investment strategist with Norwich Union in Britain probably got it right when he said: "This is not a crisis of confidence but a reassessment of the value of some of the equities markets." The word "some" is the operative term in that comment, with a strong view emerging that stock markets in Europe and North America may be about to disconnect from the Far East tiger economies, where stock valuations have become inflated especially if forecasts of lower growth and increased inflation in the tiger economies prove accurate.
Of all the Far East economies, Hong Kong is seen as very much a special case giving grounds for real concern, especially in its property market where valuations have gone through the floor. Whether that means that western stock markets will take a more dispassionate view the next time the Hang Seng suffers a double-digit collapse is, however, debatable.
The Irish stock market will inevitably take a lead from the London market, and on that London market are four major stocks HSBC, Standard Chartered, Cable & Wireless and Inchcape which are massively exposed to the vicissitudes of the Hong Kong economy. HSBC and StanChart, in particular, are heavily exposed to the Hong Kong property market and can hardly remain immune to another collapse in the local stock and property market. Indeed, it was the news that Moodys has threatened HSBC and Hang Seng Bank with a possible downgrade that knocked another 3.7 per cent of the Hong Kong market, with Moodys specifically referring to "the high level of real estate exposure at Hong Kong banks".
The proponents of the "decoupling" argument said that the 7 per cent fall in the New York market was a kneejerk reaction to events in the Far East, rather than any change in the outlook for the US economy. The cautious tone adopted by Federal Reserve chairman Mr Alan Greenspan in his testimony to Congress on Wednesday seems to reflect a view within the Fed that market valuations are not overdone.
The fact that the New York stock market has fallen from its 8299 all-time high for the Dow since Mr Greenspan made his famous comments in July about the "irrational exuberance" of the stock market, suggests that even the hawks that are worried about inflation in the Federal Reserve Board the US central bank are happy with the level of economic growth and see no need for an interest rate rise that would definitely send Wall Street into a tailspin.
The deflationary impact of events in south-east Asia over the past month is likely to mean that Mr Greenspan can continue his benign attitude towards US interest rates. Mr John Conroy of NCB has already pointed out that when US equities fell heavily on Monday, they did so against a background of a rally on bond markets.
"This would suggest that the decline in interest rates was seen as insufficient to offset the likely impact on earnings of the crisis in Asia (primarily through lower export growth and lower dollar earnings by US multinationals). More likely it reflected the fact that the market was perceived to be overvalued on an earnings basis," says Mr Conroy.
He said the developments in Asia were likely to knock two percentage points off earnings growth of the S&P 500 the broadestbased index of US shares. But major investors such as Mr Geroge Soros and Mr Warren Buffett are still thought to believe that share prices remain overvalued.
So where next for the market?
Mr John Conroy of NCB has suggested that markets typically move from overvaluation to undervaluation before they recover their upward path. Wall Street's spectacular recovery on Tuesday might suggest that that particular stock market precedent will not be repeated this time around. But many in the market fervently believe that this week's collapse in share prices should not have been reversed by Wall Street investors. There is certainly a strong argument to be made that the growth in stock markets has been overdone, with price-earnings multiples at a level which cannot be justified even by expected strong economic growth in North America and Europe. And such arguments mean that at the very least a period of instability in the markets lies ahead, as investors try to find a new direction after this week's turmoil.
One Irish fund manager who remains unconvinced about the sustainability of this week's recovery told The Irish Times: "I have shifted a lot of assets into cash and I still believe that is the wisest move. This week might be the market correction that never was, but I'm certain that the correction will come. It may be months, it might even be well into next year, but it will come."
