Georgetown Business Professor Concludes Several Factors Played Role in Recent Stock Market Drop

March 07, 2003

Washington, D.C. - Because of his expertise and understanding of the root causes that drive stock market crashes, Georgetown University Business Professor James J. Angel was invited discuss the recent 400-point market plunge February 27 on The News Hour with Jim Lehrer.

Angel has served as chairman of Nasdaq's Economic Advisory Board as well as a visiting academic fellow at Nasdaq. He has also served as a visiting economist at the Shanghai Stock Exchange.

Angel explained that several factors appeared to have caused the markets to plunge. The sell-offs began in China, he noted, and "China is so closely linked to the United States -- they're a major trade partner, they're a major supplier of manufacturing goods, they're a major holder of U.S. government debt -- if something bad happens to China, something bad is going to happen to the United States."

To Lehrer's question on whether the drop in the markets was based on real issues or was psychological in nature, Angel replied, "Well, it's a little bit of both. With the downturn in China, that would imply that the cost of capital has gone up a little bit in the U.S., as well as China, so there are some legitimate linkages there." Angel went on to explain that the market behavior is what is seen typically at the end of bull markets. That is, no one wants to be the last person holding a declining issue, so selling becomes the order of the day.

The drop in stock price was not tied solely to human activity, Angel said. He noted Dow Jones' report that some computer systems were reporting larger than actual drops in price. This may have caused some program traders to drive the price down further and faster than would have been the case otherwise.

Was this a one-day problem or the sign of things to come? "There have been 195 of these bad days since 1928," Angel said. "Sometimes they're a temporary glitch that [disappears]...quickly, and sometimes they're a harbinger of worse things to come. Time will tell."

See the interview or read the transcript.

About the Robert Emmett McDonough School of Business
Georgetown University's McDonough School of Business is a premier business school located in the nation's capital. Founded in 1957 to educate undergraduate business students through the integration of liberal arts and professional education, the McDonough School today welcomes approximately 1,300 undergraduates, 620 MBA students, and more than 500 participants in its executive education programs annually. For more information about the McDonough School, visit http://msb.georgetown.edu.

About Georgetown University
Georgetown University is the oldest Catholic and Jesuit university in America, founded in 1789 by Archbishop John Carroll. Georgetown today is a major student-centered, international, research university offering respected undergraduate, graduate and professional programs on its three campuses. For more information about Georgetown University, visit http://www.georgetown.edu.