Stocks fall on debt-ridden nation

After Friday's drop, the average NYSE stock is more than 20 percent

The buzz about a "stealth bear market" is over. For many of America's 75 million investors, a real bear market has arrived.

For weeks, the rising stock prices of some huge companies and technology firms have propped up stock indexes such as the Dow Jones Industrial Average or the Standard & Poor's 500, while other stocks slipped. Last week, big-name stocks caught up, with stock prices falling 6.6 percent - their biggest weekly drop in 10 years, according to the S&P 500 stock index.

For now, the drop is still modest, considering that most stocks are up over a 12-month period. Yet the downward trend could spell trouble for the investors that have ridden a nearly decade-long bull market.

Just as rising stock portfolios have helped investors feel comfortable with more spending and higher personal debt, a market downturn could spoil the party.

"If stock prices go down, people's balance sheets don't look so good," says Paul Kasriel, an economist with Northern Trust Co. in Chicago.

For a bull market that has enriched American investors, helped the US budget move from deficit to surplus, and fueled an economic expansion that is four months from setting an all-time record, Friday was full of bad news.

A worse-than-expected uptick in the wholesale prices paid to producers - an indicator of increasing pressure on inflation - concerned Wall Street. And comments by Federal Reserve Chairman Alan Greenspan, suggesting that investors underestimate the risks in stock investments, helped push the Dow Jones down 267 points.

Considering that the average stock on the New York Stock Exchange is down more than 20 percent from its high, some analysts see the possibility of a significant turnaround.

"We could see this whole thing go into reverse quickly," says Mr. Kasriel.

It's not so bad

But not all observers find the recent dip worrisome.

The Federal Reserve, the nation's central bank, would like the still high-flying market to "quiet down" without an adverse effect on the economy, notes Samuel Eisenstadt, research chairman for Value Line, a New York investment firm.

"By any valuation standards, stock prices are very much on the rich side," he says.

Mr. Eisenstadt suspects the market could decline further, maybe rapidly.

A popular stock newsletter published by Value Line has gradually become cautious, recommending that investors put only 40 to 50 percent of their portfolio in stocks, down from 75 percent a year ago.

Since prices peaked, stock investments have lost more than $1.1 trillion of their value.

In relative terms, that's not a grim loss. The total worth of about 3,000 American stocks - known as market capitalization - was $13.4 trillion last Wednesday, still up $4 trillion from the crisis-ridden market of a year ago, says J. Paul Horne, a London-based economist at Salomon Smith Barney Inc.

The decline of some big-name stocks may also mean that stock indexes are more in tune with the wider market.

The S&P 500 Index has been "seriously misleading," complains H. Bradlee Perry, a consultant with David L. Babson & Co., a Cambridge, Mass., money-management firm.

For example, even as smaller companies and "value" stocks are falling, the value of all Microsoft shares is approaching the value of the national annual output of Canada.

But in recent days, price declines have broadened throughout the market, led by Intel Corp. and other technology stocks.

"The whole thing is in sync now," says Mr. Eisenstadt.

In Wall Street terminology, the market may not qualify for "bear" status. Prices have to be down 12 to 15 percent for some time to deserve that title, says Mr. Horne.

"We are having a modest correction," he says.

Using Salomon Smith Barney's measure of the entire market, stock prices have fallen 4.8 percent in the past month and 7.9 percent in the past three months, but have risen 30.6 percent in the past 12 months. That was before Friday's drop.

Stocks as household assets

Yet many mutual-fund or other investors, with money stowed away in a broad list of stocks, may find their portfolios qualifying for bear status.

On balance, individual investors have been selling stocks, including investments in mutual funds and elsewhere, at the same time as the bustling market has boosted their wealth.

Stocks account for some 71 percent of the increase in net worth of households in the past four years, calculates Kasriel of Northern Trust.

In 1998, stocks amounted to a record 28.3 percent of the total net worth of US households. That's up from 12.2 percent in 1986, the year before the October 1987 crash in the stock market. Other assets of households include homes, cars, jewelry, and various financial assets.

With fat stock portfolios, many investors have felt able to borrow more to finance cars, home renovations, and so on. Total household debts were up 9.2 percent last spring from a year earlier.

This combination of reliance on stock wealth and a buildup in debt makes individuals more vulnerable to sudden downdrafts in the stock markets, says Kasriel.

What has spurred stock prices in the past four years has been stock purchases by foreigners and record levels of stock "retirement" by companies. From June 1998 to June 1999, companies bought back $305 billion of their own stock - at prevalent high prices.

These purchases boost earnings per share by reducing the number of stocks on the market. This, in turn, can raise stock prices for investors in these companies - including executives who often have stock options that can make them wealthy.

The Fed's role

Kasriel charges that the Federal Reserve has "unknowingly" contributed to high stock prices and also to consumer spending by making money easy to borrow.

Many analysts have their eyes on Fed policy as a key factor for future stock prices.

"We have a soft bond market and a stock market obsessed with interest rates," says Mr. Perry. The Fed has raised rates twice this year. Some analysts suspect it will do so again at a meeting Nov. 12.

Perry sees the correction as "a good thing," as "better than scaring people to death."

"Most investors have never experienced real losses," Perry says. "People think they are pretty smart investors. But don't confuse brains with a bull market."

(c) Copyright 1999. The Christian Science Publishing Society

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