March 13, 2001
Market Place: Bears Toss Weight Around, but Damage Is Limited
By FLOYD NORRIS
he bear market in the Standard & Poor's 500, the most widely followed broad index of large stocks, became official yesterday as the index ended the day down more than 20 percent from the peak reached last March — thus meeting the usual definition of a bear market.
But if the great bull market of the 1990's is finally over, the bear market that has replaced it is so far a very unusual one because the damage to the stock market has been so concentrated.
The collapse of technology issues has affected the Nasdaq composite index far more than it has other indexes, and the Nasdaq composite is now down 61.9 percent from its peak. That is the largest loss any major American index has suffered since the Depression and has helped dampen consumer confidence and slow the economy. But many Americans continue to buy stocks.
"Despite the 60 percent collapse in Nasdaq, people still believe that stocks are the place to be," commented Robert Barbera, the chief economist of Hoenig & Company. "That is astounding, but no doubt it reflects the spectacular performance registered over the preceding five years and the very good performance all the way back to 1982."
Since the S.& P. index peaked, many more stocks within that index have risen than have declined. But the fall of the technology stocks has caused many mutual funds, including the popular S.& P. index funds, to lose money.
"The market's rise was concentrated in technology, and the market's destruction is concentrated there," said Byron Wien, a strategist at Morgan Stanley Dean Witter. "A lot of old-economy stocks have done very well."
The S.& P. 500, which fell 53.26 points, or 4.3 percent, to 1,180.16 yesterday, is now down 22.7 percent from the peak. It was the first 20 percent decline for that index since the 1987 stock market crash. And it is the first time the index has fallen below 1,200 since late 1998.
But of the 11 investment sectors that make up the S.& P. index, seven have gained since the peak, with utilities, transportation and health care leading the way. Of the 497 stocks in the index that were around a year ago — three are new issues — 302, or 61 percent, are higher. In a normal bear market, the damage is far broader.
The total decline in the Nasdaq composite, which fell 129.40, or 6.3 percent, to 1,923.38 yesterday, has surpassed what had been its biggest fall, of 59.9 percent in the 1973-74 bear market. The only larger declines for a large American index came from 1929 through 1932, when the Dow Jones industrial average plunged 89.2 percent and the S.& P. fell 86.2 percent. The Nasdaq index dates from 1971.
In the 1973-74 bear market, all major indexes fell sharply, with the Dow dropping 45.1 percent. But even with yesterday's 4.1 percent plunge, the Dow is down only 12.9 percent from its peak in January 2000, and it is higher than it was a year ago.
"As investors fled collapsing technology stocks, they chose to buy other stocks," Mr. Barbera said.
There is no question that investor confidence has been shaken by the fall in what had been the most popular stocks, and there is less willingness now to "buy the dips" than there was until last year. Throughout the late 1990's there were occasions, like the Asian currency collapse in 1997 and the Russian default in 1998, when professional investors grew worried and many individual investors would halt the decline with purchases. There is much less of that now.
Investments in stock mutual funds are down sharply from early last year, and bond and money market funds are drawing more cash than they had. Still, some money continues to go into stock mutual funds, in large part because so many employees have their 401(k) plans programmed to buy stock funds with every paycheck. The belief that stocks are the best long-term investment remains widely held.
That faith may distinguish this market from one that it is often compared to, the 1973-74 bear market. The most successful stocks of the early 1970's, which became known as the Nifty 50, were growth stocks like Avon and Xerox that many investors believed would keep growing for decades. They kept rising for the first several months of the bear market that affected most stocks but eventually succumbed as almost every stock did.
In this case, however, the previous market leaders have led the way down, rather than falling last. And the other stocks, although they did not go up much if at all in the final stages of the bull market, have not as yet followed them down.
"This comes on the heels of an 18- year bull market, where investing in stocks had become part of the American culture," said Mr. Wien, noting that in the 1970's stocks were far less popular before the plunge. "Most Americans believe that stocks are the asset of choice for the long run. Maybe we have to crack that notion before this is all over."
Nonetheless, Mr. Wien says he thinks the stock market is, if anything, slightly undervalued, and is in the process of bottoming.
Whether that forecast proves to be accurate may depend on the economy, which slowed drastically late last year and may or may not have fallen into recession.
Of the eight previous bear markets — defined as 20 percent falls from a record high — five hit the 20 percent mark after recessions had started, while the other three, in 1962, 1966 and 1987, had no recession connected to them. In those three cases, the market's recovery began within seven weeks of the index's having fallen 20 percent.
The market continued to fall during some recessions, but turned up before the recessions ended, usually while the Federal Reserve was cutting interest rates, as it is now doing. Some recessions did not bring bear markets. In the last recession, in 1990-91, the S.& P.'s decline stopped at 19.9 percent.
The current economic slowdown has been most sharply felt at the technology companies that had been growing the fastest, which have been forced to reduce their expectations for sales and profits repeatedly. Since the S.& P. 500 peaked last March, Microsoft is down 53 percent; Intel, 60 percent; Cisco Systems, 76 percent; and Oracle, 75 percent. They are among the 25 largest stocks in the index.
Some major stocks have done quite well over the period, however. Phillip Morris is up 151 percent as fears that tobacco litigation would put it out of business have decreased. Pharmaceutical companies have done very well as growth-oriented investors sought stocks whose businesses were still expanding. Johnson & Johnson is up 31 percent; Eli Lilly, 26 percent; Merck, 20 percent; and Pfizer, 16 percent.
The gains of the technology stocks had been astounding during the two years before the peaks a year ago. Yahoo, which is down 92 percent since the S.& P. peaked, is still higher than it was in September 1998, just 18 months before the peak.
Those gains had allowed many Americans to feel wealthier and, perhaps as important, provided large amounts of income to individuals with stock options and to the federal government, which taxes profits on stock options at the same rates it collects on ordinary income. That bolstered consumer spending and allowed the government to run budget surpluses far higher than had been expected.
Now some economists, including Mr. Barbera, expect that the declines in those stocks will lead to a drying up of that income, depressing consumer spending and tax receipts and delaying the stimulative effect of the Fed's actions. But others see signs in the January and February economic statistics that indicate that the economy has already started to rebound.
Copyright 2001 The New York Times Company <<
Bush/Hoover...LOL! |
