From today's New York Times, a long piece on the market. I've bolded some sections.
March 18, 2001
With Bull Market Under Siege, Some Worry
About Its Legacy
By FLOYD NORRIS
The bull market, born in 1982 amid
recession and concern that the
American economy was terminally ill, is being
measured for its coffin.
A requiem may be premature for an animal
that arose stronger than ever after reports of
its death in the 1987 crash. But whatever its
immediate prospects after the worst week for
the Dow since 1989, this bull will long be
remembered for the changes it has made in
America.
It changed the way people lived and the risks
they were willing to take. It led to Americans
becoming more dependent on stock market
profits than ever before — and gave them
confidence that there was little need to save.
The 1990's economic boom spurred the bull
market, and was in turn increased by the
spending that the bull market encouraged.
Stock options became widespread, making
millionaires of even low-level employees in
companies that became stock market
favorites.
The stock market, once viewed by many as a
highly risky place where amateurs were likely
to suffer if they were not nimble, came to be
viewed as a sure thing, at least in the long
term.
"Individual investors got hooked on equities,"
said Robert Glauber, the chief executive of
the National Association of Securities
Brokers and a former Treasury
undersecretary in the first Bush administration.
"It went too far, and they came to think that
equities were riskless."
In 1999, as the bull market reached its zenith, the net worth of American households
rose 14.1 percent. "It influenced the size of the homes we live in, the type of cars we
drive, how we go on vacation," said Douglas R. Cliggott, a strategist at J. P.
Morgan Chase. "Because of the extraordinary improvement in the average
American's net worth, it made us feel comfortable carrying what by historic
standards would have been an extraordinary amount of debt."
Already, the stock market's fall has put a dent in Americans' wealth. Household net
worth fell 2 percent in 2000, the first such fall since the government began keeping
track of the statistic after World War II. Households had experienced a small
increase even in 1974, during the worst recession since the 1930's.
The loss of wealth reflects the fact that by 1999 Americans had 60 percent of their
investments and savings in the stock market, double the proportion they had in
1982, according to J. P. Morgan Chase. And that understates the real figure, since
retirement funds like 401(k)'s are excluded. Never before in American history has
the wealth of so many been tied to Wall Street's fortunes.
"I'm old enough to remember when you went into a bar during the summer, they
were watching a baseball game," said Byron Wien, the chief United States equity
strategist for Morgan Stanley Dean Witter. "Now, they're watching CNBC."
The bull is now, at best, wounded. In the final years of the great rise — one that saw
the Dow Jones industrial average climb 1,409 percent from the 1982 low to the
early 2000 high, while the Nasdaq composite index soared 3,072 percent — the
biggest winners were the technology stocks. Now some of the highest flyers in the
boom are dead, and even the best are down 50 percent or more from their highs.
The Nasdaq composite, dominated by technology stocks, is now down 63 percent
from its peak of last March while the Dow, which had held up much better because
of its old-economy concentration, is off 16 percent from its peak, after losing almost
8 percent last week. The Standard & Poor's 500, a widely followed index of large
companies, is down 25 percent from its high.
If the bull is dead or dying, it will leave a
society that has depended on it far more than
anyone could have anticipated even a decade
ago. Corporate America went deeply into
debt to buy back stock and obtain shares to
issue to employees, confident that share
prices would keep rising.
Family finances were reshaped. Far fewer
companies now offer traditional
defined-benefit pension plans that promise
guaranteed incomes to retirees. Instead they
offer defined-contribution benefit plans like
401(k)'s, where the investment risk belongs
to the beneficiary. When times were good,
with stock prices rising and inflation quiet,
people felt comfortable saving little money
outside of their 401(k)'s.
Now, if the perception spreads that the days of easy money are over, that could
persuade Americans to save more to finance their retirements. Savers would benefit
in the long run, but the adjustment would further depress economic activity in the
short run, damaging business profits and perhaps hurting stock prices even more.
Such a situation was foreseen by no one in the summer of 1982. The Dow was
trading under 800 and bearishness was rampant. Inflation and interest rates were
high, the American economy was in recession and pessimism was widespread
regarding the ability of American business to compete with foreign companies,
particularly those of Japan.
The stock market was lower than it had been in 1966. To make matters worse, the
accountants were cracking down by changing rules that had made it possible for
companies to ignore how underfunded their pension plans really were. To comply
with the new accounting requirements, companies would have to find ways to make
large contributions to their pension plans.
Or, they could find ways to reduce their obligations. In that atmosphere the trend
toward defined-contribution plans took off. Workers were forced to decide how to
invest their retirement money. While much of that early investment went into bonds
and money market funds that were paying high rates of interest, as time went on and
rates declined, more and more savers were forced to consider putting some money
into stocks.
Those who took the plunge did well. American business was embarking on a golden
age as its efforts to become more competitive bore fruit. Corporate profits, at 7.5
percent of national income in 1981, grew to 12.5 percent by 1997.
In 1987, it all appeared to end with a crash. The Dow fell 22.7 percent in one day,
and the bull's obituaries were written.
But the bull was not dead. By late 1989 the stock market was back to its old highs.
The lesson learned was not that stocks are risky; it was that money is to be made by
buying when prices fall.
Stock options were relatively rare in 1982, but as the bull grew they became far
more common. And at many companies, particularly technology companies, they
were offered not just to senior executives but to many others, all the way down to
the lowest levels. In the Seattle area, where Microsoft is based, so many became
wealthy that the local housing market was distorted, a fact that may have helped
lead to strikes in recent years at Boeing and The Seattle Times, where such wealth
had not flowed even though living costs were on the rise.
For the companies that issued such options, the benefits included loyal employees
— the options would be canceled if the worker quit — and inflated profits, since
accounting rules did not require that the value of the options be treated as an
expense. The companies even got a tax break when the options were exercised to
buy stock.
But as more options were exercised to buy
shares, companies worried that shareholders
would be offended that their stake was falling
— dilution is the Wall Street word —
because of the new shares being issued. So
companies bought back more and more of
their shares to avoid such dilution. For many
companies, those purchases used up most of
their available money, so they had to borrow
for investments in their businesses. During a
period of unparalleled corporate prosperity,
the debt of corporate America grew
substantially.
At the peak of the bull's vigor, Internet stocks
went wild. It did not matter that many had no
profits and little hope for any. There were
voices of caution, but they were soon
discredited as the share prices kept rising.
"I used to get that look that people reserve for benign idiots and small children when
I would say that Amazon.com would have to become the retail sales industry for the
United States to grow into the market capitalization it had at its peak," recalled
Robert Barbera, the chief economist of Hoenig & Company. Amazon is now down
90 percent.
As the new-offerings market grew to a fever pitch, the goals of those starting
businesses seemed to change. Where once the dream was to start a business and
watch it grow and become profitable, more and more seemed to see the initial
public offering as the end point, when the money would have been made.
Now the illness of the bull, and speculation that it has already died, has put new
pressure on Americans to decide whether stocks are still the best long-term
investment and that buying on dips is a good strategy. So far, Americans seem to be
putting much less money into stocks but to be avoiding selling if they can. With
Treasury bonds paying less than 5 percent interest, the investment alternatives are
not especially attractive.
Mr. Glauber, the N.A.S.D. chief executive, expresses confidence that the old
aversion to stocks will not return. "I think they will still conclude that equities are an
important part of their long-term portfolio," he said.
On Wall Street, most strategists think the stock market is at or near a bottom. Abby
Joseph Cohen, the Goldman, Sachs strategist, recommended earlier this month that
investors put more money in stocks, which she viewed as undervalued even before
last week's plunge. She set a target of 13,000 for the Dow by the end of this year.
That may prove accurate, but all forecasts are inevitably colored by recent history.
Now, that history shows years of strong gains.
Many years ago, in a very different environment, this newspaper reported that
James L. Freeman, the director of research at First Boston, was reflecting the
prevailing Wall Street opinion when he forecast that "the market's going to take the
ultimate dive" before prices were likely to turn up. "Batten down the hatches," he
advised.
That article, headlined "Dark Days on Wall Street," was printed on Sunday, Aug.
15, 1982. No one knew it, but a great bull had been born the preceding Friday. |
