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Wednesday, 14 March, 2001, 14:37 GMT
Why are the stock markets falling?
Traders gather outside New York stock exchange, Oct 24, 1929
The Wall Street crash of 1929 has entered US folklore
Stock market investors have had a tough 12 months. Share prices have fallen hard and fast, since they peaked in March last year after what seemed to be an unstoppable climb. BBC News Online examines the causes of the market meltdown.

Why are share markets falling?

Stock markets around the world are falling because they fear that the slowdown in the economies of Japan and the United States could become global, hurting company earnings.

Many multinational companies trade around the world, and are bound to be affected by problems in the world's two biggest economies.

The latest fears relate to Japan, where a ratings agency has said that many of its big banks are in trouble and could go bankrupt.

The fall in the Japanese stock market has also hit the profits of the banks, who hold many company shares.

And the markets tend to magnify the bad news, just as in the past few years they have boomed on the back of the positive economic news, especially in the United States.

That was particulary true of technology stocks - whose value has been more than halved since April 2000.

Why have tech shares fallen?

The most spectacular crash has been in the value of companies whose shares are listed on America's Nasdaq stock market.

The market has lost more than 60% of its value since the peak of the tech stock 'bubble' of almost exactly a year ago, when the Nasdaq composite index hit 5048.

The reason for this fall has been that firms connected with the internet, computing and mobile phone - so called tech stocks - dominate the 30-year-old stock market and have had a torrid time in the past year.

In total about $3,000bn has been wiped off the combined value of companies listed on the Nasdaq market in the past year.

Wall Street traders
A Wall Street trader ponders his next move
The much older New York Stock Exchange has a broader mix of companies whose shares are listed on it - long established firms such as General Electric or Exxon Mobil.

These companies, part of the 30 'blue chip' firms which make up the Dow Jones Industrial Average have suffered, but to a much less severe degree than the Nasdaq.

The situation is potentially much bleaker in Japan, however, where the markets have fallen to levels last seen before the Wall Street crash of 1987.

Tech companies in Europe and Asia have seen similar falls in value as in the US.

But the European equivalents of the Dow Jones Industrial Average - London's FTSE 100 index, Frankfurt's Dax and France's Cac 40 - have all seen their values pulled down to their levels of about two years ago.

Much of the reason for their fall is that the big telecom firms like Vodafone, BT, Deutsche Telekom and France Telecom have seen their values halved or more in the past year.

So is the tech bubble to blame for the slump?

The short answer is yes. There were plenty of warnings this time last year that tech stocks were being valued too highly.

Brent Hoberman and Martha Lane Fox founders of lastminute.com
Lastminute was floated at the height of the dot com boom
But market psychology being what it is - with no overall guiding force powerful enough to put the brakes on a buying frenzy - there was little that could have been done to stop it.

As a result, many high-tech stocks became grossly overvalued, their price reflecting anticipated future earnings rather than a solid financial track record.

It is easy to see how panic would set in when those earnings failed to materialise.

This would explain the herd-like behaviour of traders, frantically selling shares they were falling over each other to buy at eight or nine times the current price not 12 months ago.

What about other reasons?

The current market slump has not been restricted to internet, telecom and technology stocks.

There is an underlying nervousness about the future health of the US economy among investors.

The virtuous circle of rising productivity, falling unemployment and high growth - fuelled largely by developments in technology - which has characterised the US economy over the past 10 years seems to be coming to an end.

Only the most optimistic commentators had expected it to go on forever - but no one is entirely sure what happens next.

Already US growth rates have slowed sharply, despite two interest rate cuts by the US central bank, the Federal Reserve.

How will it affect the world economy?

As soon as banks and investment houses see the stock market going down, there is less enthusiasm for investment.

There is not less money - just less people investing in new businesses, which are vital to the health of the economy.

The general climate of caution and uncertainty leaks into the wider economy, especially in countries like the United States, where a large percentage of the population owns shares.

Consumers feel less confident about going out and spending money, buying a car or moving house.

Big corporations delay upgrading their computer systems or placing big orders.

That weakens the prospects for big computer companies like Intel further.

In the global economy the share price of a company like Intel or Yahoo is the first link in a complex, electronic chain reaching out to stock markets in London, Tokyo, Frankfurt and beyond.

Few economies in the world will be untouched by what happens on the Nasdaq and other US markets over the next few weeks.

And as these tech firms like Intel, Yahoo, Microsoft and Motorola have issued profits warnings, so their share prices have fallen, setting in chain the whole negative cycle again.

Where will it all end?

Anyone who knows the answer to that question could soon be a very rich person.

When the US economy goes into slowdown mode, investors look for other countries to pick up the baton of growth.

However, the world's second biggest economy, Japan, is in poor shape, a situation not helped by current political uncertainty.

The eurozone economies are also feeling the pinch, with growth spluttering in its biggest economy, Germany.

The British economy is too small to carry the burden alone.

All eyes will be on the US and hopes of a further cut in interest rates to kick start growth.

Is there a silver lining?

A short-term stock market slump is rarely enough to precipitate a full blown global recession.

Other factors, such as the price of oil, will ultimately determine the severity of any downturn.

Indeed, it could be argued that the current tech-inspired crash could have a positive effect in the long term.

It could, some analysts argue, introduce a note of caution into investment strategies and re-assert the old economy virtues of profit and loss which got obscured in the stampede to buy technology stocks.


Analysis

Economic slowdown

Background

TALKING POINT
See also:

09 Mar 01 | Business
12 Mar 01 | Business
28 Feb 01 | Business
21 Dec 00 | Business
08 Dec 00 | Business
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