Chicago tribune story [note John Bollinger quote in bold]
<<The end of the stock market boom may have been confirmed by Friday's record-breaking Wall Street plunge, but economists and financial analysts agree that the end of America's record-breaking economic expansion is nowhere in sight.
The staggering sell-off in blue-chip and technology stocks unsettled once-confident investors who had watched their portfolios grow fatter during an amazing decade of prosperity. But if the analysts have it right, the bloom is gone and expectations of steadily rising stock valuations have been dashed.
That actually could be good for the economy if the market steadies itself soon and trades in a more sustainable range, said Laura Tyson, former chief economic adviser to President Clinton. It could mean that the speculative froth in stock values, especially technology stocks, had been skimmed off without damaging the real economy, she said.
But Tyson, business school dean at the University of California, Berkeley, said the greatest risk to the recovery has always been "a sustained, significant correction in the equity market." She did not predict such a continuing decline, but said she couldn't rule it out, either.
No one is watching the drama in the markets more closely than the two main contenders for president, Vice President Al Gore and Texas Gov. George W. Bush. If the sell-off develops into a grinding bear market that eats up much of the wealth people have amassed during the Clinton years, it could curtail consumer spending and sharply slow the economy in an election year.
So far, the economy is continuing to grow even faster than most analysts think is possible over a long period. Inflation is under control despite a sharp increase last month in the consumer price index attributed largely to a rise in energy prices. Unemployment is low and many businesses, especially in the high-tech sector, report that they can't find enough people to fill available jobs.
Martin Anderson, former chief domestic adviser to President Ronald Reagan, said the U.S. economy is being driven by powerful forces that will not be arrested by "market oscillations."
He cited these as some of the forces: economic pickups in Asia and Europe, relatively low taxes and regulation, and the explosion of an information economy.
But the market's next direction is highly uncertain. Monday will bring a confusing array of bargain-hunters and nervous sellers into the market picture after Friday's 617.78-point decline in the Dow Jones industrial average and 355.49 plummet in the Nasdaq composite index, home to many of the speculative technology stocks.
"I think I'll probably be a buyer on Monday and Tuesday," said Richard Driehaus, of Driehaus Capital Management in Chicago, one of the nation's most successful growth-stock managers. "The overall economy remains strong."
But Marshall Front, a money manager with Front Barnett Associates in Chicago, said the worst might not be over. He said many investors holding margin accounts, allowing them to buy stocks with a fraction of the money on hand, will be notified that they must supply more cash to cover their debt or their stocks will be liquidated.
In addition, he said, so-called hedge funds that attempt to ride the crest of the market may continue selling. Finally, Front said, mutual funds will face demands for cash redemptions from investors forced to sell shares they own to raise cash.
Friday's market carnage capped more than a month of declining stock values that has seen the Nasdaq fall by 34 percent from its high. Analysts cited as factors a federal judge's decision to hold Microsoft in violation of federal antitrust laws, Federal Reserve Board Chairman Alan Greenspan's hint that the central bank would continue boosting interest rates, and statements by respected stock analysts that the technology sector was overvalued.
David Wyss, chief economist at Standard & Poor's, said that if the market took another plunge this week, Greenspan may be forced to back away from his threat to increase interest rates. Greenspan's goal was to remove the fluff from valuations, not cause a crash that undermines the economy, he said.
But some undermining has already taken place. John Bollinger, a well-known technical analyst and president of
"We have a 60 to 65 percent chance of being in a real bear market," he said, referring to a sustained period of prices trading at least 20 percent below their previous highs. "The damage that was done was meaningful. It's been done in the teeth of an already oversold market. It looks very troublesome to me. You can't pooh-pooh the damage."
Bollinger added: "I'm not ready to say it's a bear market, but I'm being pushed dramatically in that direction."
Economists give great importance to what they call the "wealth effect," the secure feeling that more and more Americans have developed as a result of the long bull market. Since 1989, said Wyss, stock ownership has also risen sharply. Now 49 percent of households are involved in the market compared with 31 percent in 1989, he said.
In the same way that strong drink can sometimes loosen the tongue, the wealth effect can loosen purse strings, causing people to buy at a faster clip and, often, purchase more expensive items. To some extent, Wyss and other economists say, the recent fall in the market will cause some curtailment in spending.
Tyson said this could help the economy if it does not go overboard. For example, she said, Americans may trim back some of their buying of overseas products, which could help reduce the trade deficit.
Michael Drury, chief economist at McVean Trading and Investment, a Memphis-based firm that invests in futures markets, said high-tech areas of the country such as Boston and Silicon Valley in California will feel the economic brunt from the decline.
Tyson said some companies, particularly new ones that have not been profitable, could be squeezed and put out of business. But overall, she said, the economic fallout will be contained because profitable firms clamoring for qualified high-tech workers will snap up any who might lose a job.
Wyss said the stock market plunge appeared to mirror similar plunges in 1966 and 1987. In both cases, a strong economy caused the market to bounce back?though in each case it took time. In 1987, he reminded, the then-new Federal Reserve Board chairman, Greenspan, assured markets that he would keep money flowing to the economy so that there was not a drying up of funds, causing a liquidity crisis.
Greenspan has spoken out publicly against what he has called "irrational exuberance" in stock valuations, meaning that investors had driven values up to the point that a speculative bubble existed.
Those who see a positive development in the market's decline said that stock valuations had gotten far out of line with the actual growth rate of the economy.
"This ultimately is very good for the markets," said Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania. "We are seeing a realignment of valuations to a much more sensible level."
Siegel, author of "Stocks for the Long Run," said such corrections always occur precipitously. Market declines happen two to three times faster than advances, he said. The latest advance took from last October to mid-March, while the sell-off has taken only a few weeks.
"This is in line with historical patterns," he said. "Fear is a much more motivational force than greed. Fear has a much stronger hold on human emotions than greed. It causes you to react faster."
Analysts said one casualty of the decline is the notion that somehow the stock market had divided into two camps: those representing the new economy and those representing the old economy. The idea that the two can be separated is "rubbish," Siegel said.
Added Roger Ibbotson, chairman of Chicago-based Ibbotson Associates and a professor at Yale University's School of Management: "It's going to be hard to go back to the old story about how exciting the new economy is. I don't think [investors] are going to be quite as interested because the fundamentals are not there and they have not made money at it."
Ibbotson predicted a flight to safety in bond investments in the days and weeks ahead. After that, he said, "I think money is much more likely to go into old economy stocks than new economy stocks."
Drury of McVean Trading added: "You can't blindly put money in the stock market anymore and expect it to go up 1 percent a week. This [decline] alters perceptions up and down the line.">>
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