An Oversold Market
Jude Wanniski
August 19, 1991


Shortly after 10:00, the Dow has fallen about 100 points, or roughly what the furtures spread indicated earlier this morning. Gorbachev's fall, however, should have little impact on the outlook for U.S. equities. The fact that European funds are shifting into long-term U.S. Treasury bonds hardly represents a no confidence vote in the U.S. economy. With the long bond yield holding around 8.05%, and gold unchanged from its first move upward at $362, American stocks should recover quickly from this initial panic reaction. The nearly 10% fall in the German DAX average, by contrast, reflects the continued presnce of Soviet troops in the eastern half of Germany and justifiable nervousness about their intentions. 

The Fed's near-optimal management of U.S. monetary policy and the building support for a captial gains tax cut among Republicans and some leading Democrats, though, make us more optimistic about both stocks and bonds.

Regarding the impact of Gorbachev's fall on the world economy, and the U.S. economy in particular, it should be considered that Soviet society was already headed for total disintegration. It is difficult to see how this morning's news will make matters worse. In removing Gorbachev, the Kremlin makes it clear that it still wishes to find a path to private enterprise. Jude Wanniski's analysis of Soviet developments will follow later today.