Stocks' Gilded Age finally closes

Decades hence, 2000 may be remembered as the year America's attitude toward money and investing returned to normal.

Hanging chads? The endless election? Interesting, but perhaps not as important as the apparent end of the great bull market of the Clinton era. After years in which the rules of gravity seemed to have been suspended for the stock market - and stocks became a part of the national culture as never before - things have now come thudding to an end.

The Dow posted its first loss in 10 years. The technology-heavy Nasdaq had its worst year ever. The markets' boom mentality, in which profit was deemed to be for wimps and every dotcom was worth its employees' weight in rubies, has been replaced by a more typical edgy caution.

On the plus side, many fewer people now must listen to brother-in-laws talk about quitting the firm in order to day-trade online.

"Everybody assumed that the great times would go on forever," says Michael Goldstein, a professor of finance at Babson College in Wellesley, Mass. "Investors didn't pay attention."

It's been a bad year for stocks for a variety of reasons. Uncertainty surrounding the election, both before and after Nov. 7, caused some corresponding uncertainty in the markets. A slowing economy hasn't helped - six interest rate hikes by the Federal Reserve, totalling 1-3/4 points, have already slashed gross domestic product growth by more than half.

Corporate earnings forecasts have been steadily shrinking. Three months ago the research firm First Call figured that earnings for the tech sector of the S&P 500 would go up 24 percent in 2001. The current forecast? Seventeen percent.

But nothing symbolizes the end of the party quite so much as the trouble with tech, particularly Internet, stocks. It's so bad that the phrase "dot.bomb" is already a cliche.

The heyday of the so-called New Economy now seems ancient history, like the Punic Wars, or impeachment. Once New Economy mavens valued growth and market share above all. Executives depended on an endless flow of venture capital to keep operations running. Now those same executives talk the more traditional talk of profits. Or potential profits, at least.

The Internet is still a big thing, and getting bigger. In the US, the number of people online increased 32 percent last year, to some 150 million. Amazon.com is a $2 billion business. The auction site e-Bay is a cultural phenomenon.

But it has yet to revolutionize consumer buying habits, and now investors are as unenthusiastic about the Internet's prospects as they once were enthusiastic. The Nasdaq's fall this year has been at least partly driven by the collapse of the dotcom stocks.

And the Nasdaq may still be overvalued, at least according to Michael Goldstein's calculations. Looking at the historical growth rate for small stocks, he figures it should be around 2,000, instead of its year-end 2,470.

"We bought into the Brave New World aspect of the Internet, that it was completely changing things," says Mr. Goldstein. "But radio, jet flight, computers - these were much more dramatic changes."

With their venture capital dried up, most dotcom start-ups are already behaving like more traditional businesses. No longer do they blow all their cash reserves on Super Bowl advertising.

Rust Belt-style layoffs and restructuring are now common. Whether Web designers or other such Internet-related firms take such drastic enough action is one good indication as to whether they will survive, says Aram Fuchs, chief executive officer of fertilemind.net, a New York equity research firm.

"There are a lot of [Internet] companies that will still go bankrupt," says Mr. Fuchs.

With them will likely go the last shred of the gold-rush mentality that marked the stock-market boom for so long.

More than half of Americans now own stock - many in 401(k) retirement plans provided by employers - and many of them had little experience with a bear market until now.

It seemed too easy, for so long. Put as much money as possible in stocks, get ready to retire. Since the bull market began in October, 1990, the total value of all US stock has soared from $3 trillion to an astounding $15 trillion.

Baby boomers who had thought earning money the old-fashioned way was, well, old fashioned, may now better understand the value of balanced portfolios.

"It's not the case now that people still think every stock will go to 100 from 1," says Fuchs.

But some stocks still might. And the economy is still basically in sound shape, at least so far. That means the stock markets might recover in 2001, theoretically speaking.

And if they do the Dow Jones and the S&P 500 will be leading the way.

Less tech-heavy than Nasdaq, they're more in tune with today's return-to-the-future emphasis on value investing.

Dow 20,000?

Why not? Some optimists still exist out there - Thomas Carpenter of ASB Capital Management in Washington thinks the Internet remains a tool with great potential to make business transactions, and hence the economy as a whole, more efficient.

Expect to see the Dow double by the end of 2005, he says.

(c) Copyright 2001. The Christian Science Publishing Society