January 4, 1999
Up and Down Wall Street, Part 2
Up and Down Wall Street, Part 1
With the planet awash in both goods and the capacity to make more of them, it's
little wonder that in 1998, the specter of inflation shrank to the size of a baby
pea. In its stead arose an equally scary apparition -- deflation.
Yes, yes, we know, deflation isn't a credible threat; we know that because just
about every economic kibitzer of note says it isn't. Still, we can't get over the
notion that when enough prices decline and decline enough, deflation results.
Prices declined all through last year for everything except those items people
hold most precious: stocks, bonds, houses and movie tickets.
Whether sluggish growth, no growth, the absence of inflation or a glimmering of
deflation, something is spooking central bankers. By trusty Ed Hyman's count,
there have been no fewer than 66 interest-rate cuts since October 1.
The wonder of the world in 1998, of course, was our own glorious economy,
which extended its winning streak to eight in a row. It did so, what's more, in
grand style: breaking fast from the starting gate with a GDP gain in the first
quarter of 5.5%, taking a breather in the second quarter (up 1.8%), but picking
up the pace smartly in the July-September stretch (up 3.9%) and finishing with a
rush in the final three months. For the year as a whole then, the rise in goods and
services likely approached 4%.
That sparkling performance shone all the brighter because it came in the face of
softening exports, a very subdued manufacturing sector and unrelenting pressure
on profit margins that put a crease in corporate earnings, evident to everyone but
security analysts and portfolio managers. But Jane and John Q. continued to spend
more than they earned, cheerfully dipping into their savings and merrily waving
their plastic to do so, buoyed in part by minuscule unemployment and the fact
that paychecks grew by 2.5% last year, the fastest rate in two decades.
However, what really emboldened the gallant consumer to indulge his insatiable
fancy last year was also in no small measure what accounts for Bill Clinton's
sky-high approval ratings in the blushing face of scandal: the great bull market.
Ken Starr's burlesque show was fun, the Congressional hearings, except for the
clowns holding them, were dullsville, and impeachment in the scale of things
simply isn't as important as doubling your money overnight in an Internet stock
whose name you don't remember.
So like Bubba, the economy's biggest booster in 1998 was the indomitable,
unstoppable, insuperable stock market. The bubble, as we affectionately call it.
That bubble has expanded to the point that market capitalization now tops $13
trillion and stands at an astounding 140% of the nation's annual output of goods
and services (at the peak in 1929, the scholarly Jim Bianco informs us, the
comparable figure was only 81%).
Oh, to be sure, for investors, 1998 was not all wine and roses and America
Online. Their mettle and faith were put to the test in the summer when fears that
the world was coming to an end touched off a retreat from the towering peak of
9337.86 scaled on July 17.
The panicky descent awoke the bears from their long hibernation, caused an
epidemic of sleepless summer nights in manse and humble abode alike throughout
the land and did not come to a halt until the end of August. The battered Dow,
looking much the worse for wear, was perched precariously at 7400, down a
stunning 19.5% from the top. The damage visited on lesser shares was too
horrible to quantify.
But cooler heads -- and one rather bald one, belonging to Alan Greenspan --
prevailed. Alarmed at the way the bubble was losing air and aware that the fate of
the economy and of the Chief Executive depended on its rapid reflation, Mr.
Greenspan made an interest rate cut in time and then, for good measure, another.
The first revived the market; the second ignited it. And with nostrils flaring and
hoofs flashing, the bull roared back. By November 23, it had made up all the
ground lost and surged further to a new all-time high. After the obligatory pause
to allow profit-takers to take their profits, it went back on the offensive in
December, winding up in perfect position for another record-breaking run.
As thrilling as the great bounce by the averages was, what lit up the sky over
Wall Street in the final months of 1998 was the spectacular pyrotechnics in the
Internet sector. Capitalizations soared into the billions not only for America
Online and Yahoo but for the likes of AtHome and E*Trade and eBay. Charles
Schwab, for one glorious moment, had a market cap greater than Merrill
Lynch's, thanks to its Internet connection, and Netscape's matched that of the
New York Times.
The bubble, in sum, is alive and well. As for Bubba, he's destined to be the first
President to deliver a State of the Union message while on trial in the Senate for
high crimes and misdemeanors. Makes us think that 1999 has the makings of an
interesting year at that. |
