NYT -- Investor Confidence Ebbs as Market Keeps Dropping
July 21, 2002
Investor Confidence Ebbs as Market Keeps Dropping
By GRETCHEN MORGENSON
Not long ago, United States investors were true believers. They trusted corporate executives to be truthful about
their companies' performance and prospects. They felt sure that the stock market was the only path to a
prosperous future. And they trusted Alan Greenspan to steer the economy through any storm.
But by the end of last week, the investor trust on which the bull market of the 1990's had been founded seemed to
have almost entirely vanished. As the Dow Jones industrial average careened to a loss of almost 400 points by the
close of trading on Friday, it became clear that many investors may have finally stopped believing.
Thanks to Enron, WorldCom, Global Crossing and Tyco, confidence in corporate executives and the validity of their
companies' earnings is gone.
And with trillions of dollars in lost stock market wealth, so is the trust in company shares as the way to a comfortable retirement.
After Mr. Greenspan's testimony in Congress last week, investors' faith in him suffered some severe slippage.
This, market strategists say, is what a stock bubble looks like after it has popped. Unfortunately, economists add, the stock decline is so bad that it now threatens to weaken the economy's last pillar of strength: consumer spending. If consumers shut their wallets, hope for an economic recovery goes out the window.
"I don't think we've got an awful lot of problems in the economy," said Alan Kral, portfolio manager at Trevor Stewart
Burton & Jacobsen in New York. "But we could if we totally undermine consumer confidence by knocking down the
market."
A good hard knock is certainly what the market took on Friday. The Dow Jones industrial average lost almost 5
percent for the day and fell 7.7 percent for the week.
According to Thomas McManus, chief United States strategist at Banc of America Securities in New York, $6.7
trillion has been lost in stocks since the peak in March 2000.
This wealth destruction has finally begun to register with investors who, until recently, were holding onto their falling
stock positions with an admirable stoicism. "Confidence has been pretty beat up," Mr. McManus said. "I think it's
pretty clear there are going to be more ugly revelations at companies. I think there's a chance that there will be some investors who have such a bad experience that they will never want to touch stocks again. The pressure is going to be greatest for the people who got in late because they are the ones who are looking at this as a really disastrous move."
What economists fear most is that investor losses will translate to a slowdown, or worse, in consumer spending.
While corporate spending has been nonexistent for months, consumers have kept their wallets open. Low interest
rates and surging home prices have encouraged them.
But as consumers recognize the extent to which the falling stock market has decimated their retirement accounts or their children's college savings plans, their spending may come to a halt. If corporations make additional rounds of job cuts, this possibility may become a reality.
"The really big risk is that consumers will reawaken to the timeless truth that the best way to save money is to stop spending," said Richard Hastings, chief economist at Cyber Business Credit, a retail advisory firm in New York. "And I think that will impact aggregate demand in a way that has not been seen since the 1930's."
Economists at Goldman, Sachs, for example, say that weakness in consumer spending will curb economic growth not only for the remainder of this year, but well into 2003. As a result, the firm recently lowered its estimates for gross domestic product growth to 2.5 percent this year and 2.8 percent in the next.
"My feeling is the stock market is telling us something about the economy," said James Paulsen, chief investment
officer at Wells Capital Management in Minneapolis. "That the economy is going to be really bad for the rest of the
year. I also think what it's telling us is the consumer is going to get close to capitulation in the second half."
It wasn't supposed to be this way. After a year and a half of interest rate cuts, the economy was supposed to be
chugging along. Investors were told over and over again that six months after the Federal Reserve began cutting rates, stock prices were always higher. Instead, corporations are struggling with profits, the stock market is making new lows and the economic data are weak.
Apart from doubts about whether corporate financial statements are reliable, many investors still believe that the broad market is overvalued in relation to actual profits. Many of them are staying on the sidelines until they see a turnaround in profits, which remain under pressure.
With economic weakness still weighing on the market, investors are beginning to doubt Mr. Greenspan and his control over the economy. Indeed, one of the biggest shifts that market strategists sensed last week among investors was a diminished trust in the Fed chairman.
Throughout the two years since the stock market peaked, investors have viewed Mr. Greenspan with something
approaching awe. Now they are wondering if he can do anything to stop the market's slide.
"Greenspan did not have his typical calming moments in front of Congress," Mr. Kral, the portfolio manager, said of
his testimony last week. "He came away looking like a follower in the marketplace, not a leader. And that undermined some people's conviction with regard to the market's direction."
As they begin to wonder about Mr. Greenspan's power, investors' fears can only escalate. "Behind this downward
move is a Fed impotency panic," said Mr. Paulsen. "What's the catalyst that can turn the market around? Usually it's the Fed." But he added that investors seem to be so anxious these days that if the Fed moved, it might scare investors even more, if temporarily.
Many investment strategists think that investors are spending the weekend sorting through their fears of what the
coming weeks might bring. These ruminations may results in further selling on Monday. As Mr. McManus pointed
out, markets rarely hit their lows on Fridays.
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