January 1, 2002
BUSINESS
After Two-Year Drop in Markets, Calendar Turns on Note of Hope
By FLOYD NORRIS
he three major stock market averages have now fallen for two consecutive years for the first time since the brutal recession years of 1973 and 1974. But a rally in the final three months helped to create optimism that the worst is over for both stocks and the economy.
With moderate declines on the final day of the year, the Dow Jones industrial average finished 2001 with a loss of 7.1 percent, the Standard & Poor's 500 stock index fell 13 percent and the Nasdaq composite sank 21.1 percent.
"At least for the first half of 2002, the economy will get better, and the stock market will get better," forecast Charles H. Blood Jr., a strategist at Brown Brothers Harriman, stating an opinion that is widely held.
Despite the losses of the last two years, many investors who rode the market through the 1990's remain far ahead of where they were a decade ago. All the major averages are higher than they were in mid-1998.
Though investors have not pulled out of the market in large numbers, many have become more cautious. Recently they have invested far less in mutual funds than they did earlier, while stepping up their purchases of presumably safer funds that hold corporate bonds or Treasury bonds.
Investors have had reason to worry about stocks. The collapse of Enron (news/quote) was the most prominent disaster of the year, but it was not even close to the biggest dollar loss for shareholders. Enron's market value fell more than $61 billion, a fraction of the $148 billion lost by investors in Cisco Systems (news/quote), according to calculations by Howard Silverblatt of Standard & Poor's. Five other big companies had steeper declines in market value than Enron did: EMC (news/quote) Networks, Oracle, Nortel Networks (news/quote), Merck (news/quote) and General Electric (news/quote).
G.E. fell 16.4 percent, only a bit worse than the S.& P. 500, but as the largest company in America, with a market value of $398 billion, even a small decline produces a large dollar loss for shareholders. Merck, down 37.2 percent, warned that earnings will not grow in 2002. The others are large technology or telecommunications companies whose businesses suffered and whose share price fell by more than half, ranging up to the 79.3 percent fall for EMC, the leading data storage company. Enron's shares fell 99.3 percent.
The best performer, in total market value, was Microsoft (news/quote), which gained $123 billion as it managed to avoid the threat of legal dismemberment. I.B.M. (news/quote), the big technology company that seems to have done the best job of riding out an industry downturn, added $62 billion in shareholder value.
The best-performing stock in the S.& P. 500, in terms of percent gain, was Nvidia, a software company that was up 308 percent. The next four companies in S.& P. performance, all up at least 140 percent, were retailers: Office Depot (news/quote), Autozone, Best Buy (news/quote) and J. C. Penney. Of those, all but Autozone were bouncing back from sharp declines and remain below where they were in earlier years.
The recent rally began after the stock market bottomed on Sept. 21, in the aftermath of the terrorist attacks. The best performances during the rally came from stocks that tend to rise and fall with the economy, including technology stocks. The Nasdaq composite turned in its second-best quarter ever in the last three months, rising 30.1 percent.
The rally was so strong that the Russell 2000, an index of relatively small companies, ended the year with a 1 percent gain. It was the only significant index to rise for the year, and its performance could presage a return to leadership by smaller companies.
"The market has a head of steam" and is likely to go higher early in 2002, said Steven Leuthold of Leuthold & Company, a money manager based in Minneapolis. The valuations of smaller companies remain far lower than those of most large ones, he said, adding that in the next bear market big companies were likely to suffer far more.
If the recession that began last spring turns out to be a normal one in duration, and if the recovery is also in line with the historical norm, then investors seem likely to be rewarded for their optimism. That is the prevalent view on Wall Street, where it is recalled that sustained declines for the major stock market averages are rare. The most recent period when the Dow and Standard & Poor's 500 fell for three consecutive years was 1939 to 1941.
For 2001, the Dow's recent recovery took it from a 23.6 percent decline through Sept. 21 to a loss of just 7.1 percent. That follows a 6.2 percent decline in 2000.
The Dow's recovery was helped by strong performance from economically sensitive stocks. Three of the 30 Dow components — Intel (news/quote), Home Depot (news/quote) and Citigroup (news/quote) — gained more than 50 percent in the rally.
The S.& P. 500, which has a smaller representation of stocks that are particularly sensitive to the economy, fell further earlier in the year and recovered less at the end, to finish off 13 percent in 2001 after dropping 10.1 percent in 2000.
The Nasdaq composite, which was the star of the bull market with its technology companies, also managed to stage a strong revival after Sept. 21. But it had fallen so far early in the year that it ended down 21.1 percent for 2001, compared with a fall of 39.3 percent the previous year.
But the rally left the index with a gain of 30.1 percent in the final quarter, a performance topped only by the 48.2 percent gain in the last three months of 1999, as the Internet bubble was nearing its peak in the spring of 2000.
Stocks showed small declines for most of yesterday — a day many investors treated as a holiday — before widening their losses in the final hour. The Dow, S.& P. and Nasdaq indexes all ended the day down at least 1 percent.
For the year, the S.& P. closed up or down at least 1 percent on 42 percent of the trading days, up from 40 percent in 2000, for the greatest volatility since 1974. The Nasdaq moves exceeded 1 percent on 68 percent of the days, making it the second most volatile year for that index, behind the 75 percent in 2000.
If the recession is nearing an end, then the two forces that deserve the most credit for keeping the downturn narrow will be the Federal Reserve, which cut interest rates 11 times during the year, and American consumers, whose innate optimism surprised many forecasters both before and after Sept. 11.
The housing market, which in previous recessions generally suffered quickly and deeply, seems likely to emerge barely scathed. In fact, 2001 may end up setting a record for home sales. Similarly, the automakers offered discounts — partly through zero-percent financing — that wiped out their profits, but kept car sales surprisingly strong.
The fact that the consumer did not give in also makes it less likely that consumer spending will rebound sharply in the early months of the recovery. That makes it more likely that the recovery will be less vigorous than in the past.
One factor that could keep consumer spending relatively strong, however, is a continued belief that the boom was a normal time, not an extraordinary one.
"If households expect the type of financial-asset returns that occurred in the 1980's and 1990's, then they may see little need for a higher savings rate," said William C. Dudley, chief United States economist at Goldman, Sachs. He noted that investors who split their money between large stocks and long-term corporate bonds would have earned an average annual return of 16 percent from 1982 through 1999.
Mr. Dudley says that even assuming a good economy, the annualized return on such a portfolio will probably average 7 percent to 8 percent in the future. If so, consumers may conclude they need to save more — thus depressing current economic activity — to finance their retirement plans. But that adjustment is likely to be a prolonged one.
The declines in the stock market, while they have gone on for two years, are not that severe by one measure. At the lows in 1974, the Dow and S.& P. had fallen to their lowest levels since 1962, and a whole generation of investors had losses on their investments. At the lows of 2001, all major indexes were higher than they had been in early 1998. A three-year low seems far less daunting than a 12-year one.
In the late 1990's, a belief that the economy was entering an age of rapid productivity gains helped to spur the bull market. The Federal Reserve, which came to believe in the productivity story, has continued to forecast that it will soon resume.
"This is an incredibly important issue," said Stephen King, an economist with HSBC in London. "If growth rebounds after the latest downswing and the U.S. economy delivers a continuation of the growth rates of the late 1990's, then we will truly be in a new golden era. At least some of the rapid gains in equity prices seen in the late 1990's will have been justified."
If growth does not rebound, some of the assumptions of the late boom could come under question, leading to greater investor disenchantment with the stock market. But it seems likely that it will be many months, at the earliest, before there is a clear answer to that question.
It is not only the stock market that now seems to be confident of a recovery. The corporate bond market also seems to have concluded that things are looking up. Credit spreads — the difference between yields on corporate bonds and Treasuries of similar maturities — have narrowed and long-term interest rates declined only slightly for the year, despite the Fed's aggressive easing.
One difference between the current recession and the one that ended a decade ago is that the financial system appears to be in much better shape. No large banks are viewed as being in trouble, while many seemed shaky then. Thus they are in better position to lend to companies with good prospects. Credit for companies with high credit ratings remains plentiful in the capital markets, although it is difficult for companies with poor credit to borrow.
Many of the excesses of the late 1990's, particularly in the telecommunications industry, were financed by the bond market and even by equipment suppliers, rather than by banks. Still, many of those excesses are being worked through, and banks are suffering from them.
Last week Global Crossing, which built a fiber optic network largely on borrowed money, staved off a bankruptcy filing by persuading banks that are owed $2.25 billion of its $11 billion in debt to waive provisions in their credit agreements. Global Crossing stock fell 94 percent in 2001, ending the year at 84 cents. It peaked in 1999 at $64.25.
The prevailing mood on Wall Street is that while there are companies like Global Crossing that may be permanently damaged, the American economy will rebound and most stocks will do quite well in 2002 and beyond. As the new year begins, there is optimism.
Home | Back to Business | Search | Help Back to Top
Copyright 2002 The New York Times Company | Privacy Information |
