Exactly 20 years ago, the Dow Jones Industrial Average dropped 500 points in one day. Black Monday marked a turning point, both in confidence and in an exuberant economy fueled by junk bonds, leveraged buyouts, and corporate raiders. Although stocks soon rebounded, over the next several years companies struggled with tight credit and a sluggish economy. Masters of the Universe lay low while CFOs who could restructure balance sheets emerged as heroes.
I think we’re at a turning point today. Clearly, fallout from the subprime-mortgage mess is spreading. Confidence, as measured by the Duke University/CFO magazine Business Outlook Survey (see By the Numbers), has reached a record low (for the six years of the survey), with about two-thirds of U.S. finance executives expressing pessimism about the economy. As senior writer Kate O’Sullivan reports, the credit crunch tops the list of worries, with fully 25 percent of companies expecting to be squeezed in some way.
Today, as in the 1980s, we are feeling the hangover wrought by financial markets that have been operating with too little regard for the real worth of the assets underlying some very complex financial instruments. What comes next?
Now, as then, highly leveraged companies will struggle and the strong will thrive. But, as we suggest in our special section on banking and finance, one critical factor distinguishes this period from the late 1980s: the global nature of banking. The Basel II rules should lend more stability to the system, while the breadth of services offered by foreign banks give U.S. companies more options than they had 20 years ago.
Maybe we can break this 20-year cycle. In the meantime, I’m betting on a bull market for strong CFOs.