Seattle article
<<Now what?
That's the question after a massive sell-off on Wall Street last week that wiped more than $2 trillion in value from America's stock market, $1 trillion of it on Friday alone.
As investors look ahead to the opening of the market tomorrow morning, there are many other questions: Will the selling continue, pushing values down even farther? Or will the market react like it did after a big drop in 1987, falling early in the day only to rally strongly in the afternoon? Is this the end of the longest bull market ever? And if it is, now what do I do?
Tough questions, especially for small investors with money in the market for retirement or education of their children.
No one can predict the future, of course, so what happens tomorrow and beyond is unknown. Even the experts are divided.
Some are optimistic:
"This is what a bottom looks like," said the California Technology Stock Letter, an authoritative expert on high-technology stocks, which have taken the deepest plunge. That newsletter encouraged its readers to buy, saying, "Top-quality technology stocks are moving from weak hands to our hands at rock-bottom prices."
Others, meanwhile, are delighting in I-told-you-so pessimism:
"The lesson is going to be the market is not a game, the market is not a casino; it's a serious thing for serious people," said Marc Cohodes, general partner of Rocker Partners, a New York-based fund.
Last week's sharp decline was driven in large part by investors who had bought stocks on margin accounts, or with borrowed money. As stock prices dove, those investors were forced to sell to cover their borrowings.
But there was another phenomenon last week that was widely overlooked: Long-term investors - among them, a lot of Main Street people invested in mutual funds - shifted their money within the market rather than selling outright. AMG Data, which tracks mutual-fund flows, said $8.4 billion flowed into stock mutual funds through last Wednesday, the latest figures available. Even Friday, several mutual funds reported limited selling.
What that all means for trading tomorrow is the likelihood of what happened after a similar sharp decline in October 1987, when the market lost more than 500 points in a single day and a much larger percentage of its total.
On the first trading day after that decline, the market dropped sharply at the opening as more investors suffered what are called "margin calls," forcing them to sell stock to replace borrowings. But after that, the market turned and posted an increase for the day.
As sharp as the decline was last week and as uncertain as the future is now, remember what the decline is not:
It is not a 1929-style market crash. On a percentage basis, this is still a relatively mild decline - officially, still a "correction" for the broader market.
It is not a low point for the market. The Nasdaq composite index closed at 3321.29 on Friday, back to where it was only last November. On April 16 last year, the Nasdaq was at 2,484.04. Even with last week's plunge, the Nasdaq is still 34.7 percent ahead over the past year.
The Dow Jones industrial average closed at 10,305.77, ahead of its most recent low point of 9,796.03 on March 7. A year ago, it was at 10,493.89, meaning the Dow stocks are down only 1.8 percent.
It is not uncommon for declines to be much sharper than increases. In the competing emotions in a stock market - greed and fear - fear is often said to be the more powerful. Friday's decline showed that.
Where do we go from here?
OK. So things might not be as bleak as they seemed Friday. But, again, where is this train headed?
The key is investor sentiment.
In other market declines over the past decade, investors have been quick to follow experts' exhortations to buy on dips. That buying has driven U.S. stocks, especially technology stocks, to unprecedented levels.
That could happen again when the market opens tomorrow. But as investors reviewed the damage wrought last week, their uncertainty about the market's near-term prospects was palpable. Few of them sounded eager to step up and buy.
There was a sense of shock among many, a suggestion that the game had run its course, at least for a little while.
The selling did not reflect panic. It was a worse-case scenario - a steady and relentless decline that showed few signs of letting up as the 4 p.m. bell finally rang.
Among individual investors, panicked sellers were hard to find, except for people who had to pay taxes or who faced margin calls. Figures from Birinyi Associates, a stock-market research firm in Connecticut, confirmed the anecdotal evidence, showing that big institutions, not individuals, accounted for most of Friday's selling.
But no one seemed to be bargain-hunting, either. The aggressive buyers who drove technology stocks to all-time highs last month seem to be out of fresh cash, and more conservative investors still think the high-fliers are too expensive.
Even if the overall market stablizes, high-tech companies are likely to be examined more closely than ever. No longer will they be considered a sure thing simply because they deal with the burgeoning Internet.
Instead, investors will look for what they seek from traditional companies: profit. Likely, they will increasingly bail out of many high-tech holdings, meaning further losses for the tech-heavy Nasdaq market.
Indeed, by most measures, technology stocks have been in a bubble for years - many have stock prices 100, 200 or even 300 times their annual earnings, when they have any profits to measure at all. In less heady times, most stocks sport prices that are 30 times or less their annual earnings.
Friday's plunge was needed to wring excesses out of stock prices, said Roberta Pauer, an economist with the Washington State Employment Security Department.
"It was long overdue," said Pauer. "It will be a good thing for the economy to have stock prices more realistic. It has been a bubble and the losses are paper losses for many people."
Not all, of course. If an investor jumped into the market in the past month, worried that the fast-moving train would leave him behind, he was hurt badly.
Will the economy cool now?
The most serious question about the slide in the stock market has less to do with investors and losses than with the economy as a whole.
The U.S. economy has boomed - it hit its longest-running expansion ever two months ago - as the stock market has soared. Now, with stocks much lower, will the economy cool as well?
The answer to that has as much to do with psychology as it does with economics. How consumers feel about the economy will have much to do with how well it performs over the next few months.
The booming stock market has certainly helped the economy, creating what is called the wealth effect: investors who feel richer spend more.
What brought the market to its current slump is clear enough now. The first chink in the armor was Microsoft's troubles with the government antitrust case against it. When negotiations for an out-of-court settlement broke down, a federal judge handed down a sharp opinion against the company, saying it had broken antitrust laws.
Then a respected Wall Street analyst raised concerns about Microsoft's earnings and a slowdown in personal-computer sales. Whether he is right will be learned Thursday when Microsoft reports its earnings for the most recent quarter.
Then, the consulting firm Forrester Research warned that many Internet retailers will be out of business or swallowed up by more traditional companies by next year.
And finally, a pair of government reports showed burgeoning signs of inflation. For weeks, inflation was confined to gasoline and energy, but in March it spread to other areas of the U.S. economy. This suggested that the robust demand generated by the stock market had finally given business the power to raise prices and make them stick.
The announcement of the inflation breakthrough - in the form of an 0.7-percent increase in the Consumer Price Index - came from the Labor Department an hour before the stock markets opened, and contributed to the huge sell-off.
Pauer, the state economist, said the local economy will feel the impact of the selloff, although no recession is predicted.
"At these prices, Microsoft employees will not exercise stock options," Pauer said. "That means about $5 billion expected to flow into the economy over the next three quarters is being shut off."
The most affected area of the local economy might be the housing market, which has been driven to steady, nearly double-digit gains for several years. Without the cushion of stock options to pay for expensive houses, the overheated housing market could cool a bit.
The other impact on the economy may be companies seeking to sell new shares of stock, called initial public offerings. There have been a slew of them in the process of coming to market, but many of them now are delayed by the decline in technology stocks.
It means they might not be able to get as much as needed in the public offering. While most attention is focused on trading stocks, companies go to public markets to raise money. Without that infusion of cash, new companies may find it harder to expand.
What happens this week and how important last week's plunge proves to be depends on many factors:
How much will the market bounce back next week, if at all?
Will people reduce spending enough to trigger a recession?
Will businesses, finding it harder to raise money on Wall Street, cut back investment plans, delivering a blow to long-term economic growth?
Past history says there are reasons to remain optimistic. Stocks lost an astounding 23 percent on a single day, Oct. 19, 1987. Yet even the 1987 debacle caused relatively little hardship on Main Street.
Wall Street and Main Street are seldom in lockstep. Microsoft has lost more than a quarter of its value in the past week, but it has not laid off any workers. Software companies with good business plans and strong markets continue to expand.
Even on Friday, as the market plunged, Netstock Direct, a Bellevue-based company, received $30 million in new venture capital to help expand its online investment service that allows investors to make small, regular investments.
The opening bell for the stock market will ring at about 6:30 a.m. Seattle time tomorrow. Broker-dealers in the Nasdaq market will be huddled over their computers.
If the experts are right, high-tech stocks will still be in the midst of a substantial downturn. The Nasdaq may tumble even more. Investors who borrowed money to play the market will likely lose even more as they sell stock to cover borrowings.
The rest of the market will depend on psychology - especially how long-term investors, the ones who buy and hold, view the market. Most of them figure to ride this one out.
Will the slide end tomorrow? The answer may come soon after that bell rings.>>
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