The magic of the market is switching into a magician's vanishing act.
Consider just one statistic: More than $2.4 trillion of stock wealth has now vanished since US markets peaked March 10 - an amount equivalent to the third-largest economy in the world.
As investors look ahead - warily - to another week of trading, analysts in the United States see several repercussions from one of the worst runs in Wall Street history:
*The retreat that has been concentrated in technology stocks has now spread to other sectors of the market. The question is: Will the broader sell-off continue and will it chase individual investors from the market?
*Enough wealth has been lost, on paper in and in reality, that it could start to curb consumer spending, a driving force behind the nation's enduring economic expansion.
*The decline will not likely keep the Federal Reserve from raising interest rates again, but it could forestall future hikes if the market "correction" persists.
"There are so many kids who have never seen anything like this before," says Marty Oestreich of Long Island, who was among the millions of individuals watching the market closely last week. "They are going to be the most affected."
What set off the downturn was some indication of a revival of inflation. The government reported Wednesday that prices of imports were up modestly. Next day it was reported that the price of producer goods was up 1 percent in March, largely due to energy prices. On Friday, came a more serious blow to investors. Consumer prices rose 0.7 percent, the highest level in five years and above Wall Street expectations.
With the Federal Reserve poised to raise interest rates again next month, this spike came at "the worst possible time," says Gordon Richards, chief economist of the National Association of Manufacturers.
On Friday, frightened investors drove the blue chip stocks, measured by the Dow Jones Industrial Average, down 615 points, or 5.6 percent, to 10307. The Nasdaq Composite average, laden with the shares of high-technology companies, fell even further - by 357 points, or 9.7 percent.
Over time, the decline could start to impact the psychology of consumer purchasing - the so-called wealth effect that has helped propel the longest economic expansion in US history.
It should have "a pretty healthy negative wealth effect," says J. Paul Horne, a London-based economist for Salomon Smith Barney, a major brokerage house. In other words, as he put it, the well-to-do fellow thinking of leasing a Lear Jet to get to Nantucket Island may decide to drive to the ferry instead. Others less prosperous could delay new car purchases or expensive vacations.
Still, analysts are divided over whether the market decline will slow the economy enough to moderate the Federal Reserve's drive for a tighter monetary policy. "It's bound to say something to the Fed," says Mr. Horne.
Most expect the Fed to raise interest rates again when its policymakers meet in May. Robert Parks, a Wall Street economist who has been warning of the "bubble" in stock values for months, figures there is now a 90 percent chance of a "growth recession" (an extended period of slow growth in the economy) and a 50 percent chance of a genuine recession, where national output declines for half a year or so.
Most economists disagree. They expect the economy to move ahead at a handsome pace. "We have seen bigger pullbacks and corrections" - in the summer of 1998 - without downturns, notes David Blitzer, chief economist at Standard & Poor's DRI in Lexington, Mass. The underlying view that the economy is in great shape, that technology is a good place to be invested in the long run, "is not going to go away."
Franco Modigliani, a Nobel Prize-winning economist regarded as an expert on market bubbles, sees the Wall Street bust as "a needed, healthy correction."
He expects prices to fall further before stocks reach a reasonable fundamental valuation. "I consider this the beginning, not the end," says the Massachusetts Institute of Technology professor.
Professional investment managers often feel obliged to stay in the stock market in the event prices bounce back. But Parks says, "This is more hope and hype than likelihood."
Many investors wish they were already out of the market. "Last year my stocks were up 47 percent," says Gloria Hutchinson, a Connecticut resident. "Now I'm probably losing money. But this is a long-term investment. It may take 10 years to make it back."
Analysts remain particularly skeptical of dotcom stocks. Alan Skrainka, chief market strategist for Edward Jones, a retail brokerage house based in St. Louis, says his firm would not allow its customers to buy some 400 high-flying stocks on margin - on borrowed money - since late 1998. "People got carried away on the idea of a New Economy," he says.
The value of all US stock is now below the $16 trillion level at the start of this year, but above the $12.3 trillion level of Jan. 1, 1999. Equities accounted for 31.7 percent of the net worth of American households in 1999.
*Ron Scherer in New York contributed to this article.
(c) Copyright 2000. The Christian Science Publishing Society