In the wondrous days of last February and early March, whentechnology was everything on Wall Street and no price seemed toohigh for an Internet stock, there was a simultaneous bull market innovel rationales for what was going on.
Even some of the people who worried about a tech-stock collapseargued that it might not be a big deal to investors, preciselybecause prices had risen to such amazing heights in such a shortperiod.
That rationale went like this: At its peak of 5,048 in March, theNasdaq composite index had doubled in just seven months. Therefore,even if the index fell more than 40 percent -- a horrendous bearmarket by any measure -- it would only be back to its levels of thefall of 1999.
How painful, really, could that be?
Well, here we are, with Nasdaq as of Friday down 42 percent fromits March peak. The loss was 45 percent going into Thanksgiving Day -- making this decline the worst since 1973-74 -- before Friday's 5.4percent index rebound in a sparsely attended half-day tradingsession.
Does it hurt that Nasdaq has, in effect, made no net progress inthe last year? Perhaps not to investors who bought in well beforethat. But ask the person who shifted his or her retirement savingsinto a technology-heavy stock fund in February or March, at or nearthe market peak. Or ask the people who paid between $120 and $250 ashare for Yahoo Inc. between December 1999 and August of this year -- and who now are holding a $41 stock.
Those investors now are gripped by fear, and understandably so.That is the primary emotion generated in any stock crash. But today,fear infects not only the people who have lost mountains of money intech, but also many of those who have watched from the sidelines.It's the latter factor that was missing in the argument last winterthat a 40 percent Nasdaq pullback might not mean much.
Peel away every other excuse given, and here's why tech stockshave continued to fall in recent months: Many people are simplyafraid to buy.
That is, of course, the reverse of last winter, when many peoplewere afraid not to buy.
Sentiment reversals on this scale aren't unusual. The history ofmarkets (not just for stocks, but for anything humans trade) isfilled with examples of panic buying followed by panic selling, ofeuphoria followed by despondency.
Bullish investors would simply turn that around: Despondencyeventually leads back to euphoria, they say. So the best time to buy
something -- or at least, to buy high-quality assets -- usuallyis when most people are overcome with fear and refuse to step up.
The problem today is that investors' fears are increasinglyrooted in fundamental market, economic and political concerns thathave the potential to be longer lasting, which means the downwardpressure on stock prices may continue for some time, or even worsen.
In other words, the bear market in Nasdaq may be far from over,and the risk is that it spreads to other sectors that so far haveheld up far better than technology.
Consider what investors faced a year ago. The economy wasbooming, and so were corporate profits. Oil was around $25 a barrel,and seemed to be stabilizing. And though the Federal Reserve hadalready raised interest rates three times, many Wall Street proswere convinced the central bank wouldn't tighten credit much more.
Today, the economy is unquestionably slowing on many fronts.That, in turn, is showing up in corporate earnings growth, which ismarkedly decelerating.
The Fed seems in no hurry to begin cutting rates. In themeantime, many banks, hurt by rising loan losses, continue totighten credit to their corporate customers.
In the corporate junk bond market, a surge in defaults this yearby deeply indebted bond issuers has caused potential bond buyers topull back, which has sent the yield on the average junk bond issuesoaring to nearly 12 percent, the highest since 1992.
Oil prices have reached $35 a barrel, and natural gas prices areat record highs. U.S. consumers who have begun to get their wintergas or heating-oil bills should be prepared for major sticker shock.Yet the Organization of Petroleum Exporting Countries seems to beserious in its resolve to avoid another collapse of energy prices,even if the global economy slows.
Meanwhile, the U.S. political stalemate and the Middle Eastviolence need no rehashing here. People may argue whether thosecrises are hurting the stock market, but they certainly can't behelping the situation.
Investors' reaction to all of this, predictably enough, is to shyaway from taking significant risks.
Neither do they want their companies taking such risks. Witnessthe reaction in Coca-Cola stock last week on news that the companywas considering a $13 billion-plus purchase of Quaker Oats. Cokestock plunged 10 percent over two days after the news broke. WhenCoke pulled out of the bidding, its shares snapped back 8 percent.
Now, history also teaches that short-term rallies can occur evenin the most depressed markets. Indeed, they often occur in suchmarkets at the first sign of meaningful good news, as some investorsbet that the bottom has finally been reached.
Many Wall Street pros are betting that beaten-down tech stocksare primed for a big rebound soon. It may even have begun withFriday's Nasdaq surge. Maybe the news this weekend from onlineretailers, as the holiday-shopping season got under way, will spurthe Net sector. But can the market reach a true long-term bottomhere and go on to hefty gains in 2001?
Buyers today may not care if they're seeing the ultimate lows ifthey believe they're smart enough to see long-term values but notsmart enough to pick the absolute bottom in prices. That's areasonable approach to investing, of course, and one that should payoff if your viewpoint truly is long term.
The issue is whether the fundamental problems bedeviling WallStreet today could mean a much deeper decline in share prices -- anda longer-lasting decline -- than even the most steeled investors areprepared to experience.
An official bear market is a decline of 20 percent or more in amajor stock index, such as the blue-chip Standard & Poor's 500. Bythat yardstick Nasdaq is already deep into a bear phase, though theS&P itself, at 1,341.77 on Friday, is down just 12 percent from itsall-time high reached on March 24.
Since the mid-1950s, bear markets in the S&P 500 have lastedanywhere from two months (measuring from the index peak to itstrough) to as long as 21 months.
Full recoveries can happen quickly. But the average recovery timefor the S&P has been well over one year from its bear lows.
History cannot tell us the future. But it can remind us how muchpatience the market can demand of us when things go bad.
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