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Financial markets

Wall Street's Worst Year Since 1990 Brings Widespread Uncertainty

Strategic Insights

— 2 min read

As Wall Street entered the new year, stock traders and investors were met with far less certainty and optimism than they did a year ago, with many analysts predicting a potential stealth recession in the second quarter of 1995. The Dow Jones industrial average closed the year at 3,834.44, up 1.01 point for the day, but its gain for the year was a mere 2.1 percent, not enough to exceed the inflation rate, which the Fed battled to keep at 3 percent.

Key Takeaways:

  • The Dow Jones industrial average closed the year at 3,834.44, up 1.01 point for the day, but its gain for the year was only 2.1 percent, not enough to exceed the inflation rate.
  • The biggest reversal in the bond market since 1979 was triggered by the Federal Reserve's decision to raise short-term interest rates, which caused corporate borrowing costs to soar, upsetting Wall Street's expectations about inflation and company earnings.
  • Over 50% of the Dow's 30 component stocks rose in price, with 9 stocks posting double-digit increases, but the losers were so large and their price drops so steep that they dragged down the gainers almost to the break-even point.
  • The economy may be heading into a stealth recession by the second quarter of 1995, according to Michael Metz, chief investment strategist for Oppenheimer & Company, with the pace of economic growth so slow that unemployment would start to rise.
  • The capital gains tax cut may backfire, as it may encourage too many companies to sell stock to the public, further depressing stock prices.
  • The market's 1995 performance will depend heavily on whether the Fed stops raising interest rates, according to William R. Rothe, head of Nasdaq trading at Alex. Brown & Sons.

Statistics:

  • The Dow Jones industrial average gain for the year was 2.1 percent.
  • The inflation rate battled by the Fed was 3 percent.
  • The Dow Jones industrial average closed the year at 3,834.44.
  • The S&P 500 index fell 1.3 percent for the year.
  • The Nasdaq composite index fell 2.4 percent for the year.
  • The Wilshire 5000 index of most of the nation's stocks fell 2.2 percent for the year.

Sources:

  • "As Wall Street finished its worst year since 1990..." - The New York Times (no date mentioned)
  • Michael Metz, chief investment strategist for Oppenheimer & Company
  • William R. Rothe, head of Nasdaq trading at Alex. Brown & Sons
  • Datastream; Bloomberg Financial Services (for the chart and table)

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