On March 24, 2000, then-President Clinton was still fighting his legal and personal battles. The nation was wrapped up in the NCAA's Final Four. And many investors were paper millionaires as the stock markets hit their peak.
Today, only a few historians care about Mr. Clinton's gaffes, and only a few sports nuts remember that Michigan State went all the way. But hardly anyone who owns stocks and that's about half the nation's population can forget what's happened to their stock portfolio.
Over the past 27 months, the nation's stock markets have lost about $5.5 trillion in value, or nearly three times what the US government spends annually. On a dollar basis, the nation's loss of wealth is greater than all the other US market declines combined.
The implications of this huge wealth shrinkage are still being felt: Business is reluctant to embark on new ventures while stock prices languish. Consumers are more restrained then a few years ago. Policymakers are watching nervously.
"This tremendous loss of wealth is a weight on the economy," says Mark Zandi of Economy.com, an economic website. "It threatens to take on a life of its own."
The market's decline has been particularly onerous the past few months as corporate scandals and bankruptcies have battered stocks. Companies worth billions are now worth millions. Even some of the mom-and-pop favorites, such as telephone stocks, are reminiscent of Depression-era prices. Most people just groan when asked about their stock holdings.
And hardly anyone is immune from the decline. Take a survey that U.S. Trust Corp. released yesterday on the wealthiest 1 percent of Americans, who have annual income of $300,000 per year and assets of $3.2 million. It found that 85 percent of these super rich had seen their portfolio decline by an average of 17 percent. "It's the steepest decline we've seen. It mirrors the markets," says Maribeth Rahe, president of U.S. Trust, a New York-based wealth-management company.
Mutual-fund investors, who represent a broader segment of America, have also seen their investments evaporate, losing about $700 billion in value since March 2000. In May this year, new investments in stock funds shriveled to $4.9 billion, down from $13.8 billion just the month before. "Investors have gotten a lot more conservative," says Kristin Adamonis, a research analyst at Financial Research Corp., a Boston-based mutual-fund firm.
This kind of shellacking has often been bad news for the economy, since investors are also consumers. Some economists estimate that investors spend about $4 out of every $100 made in the stock market. If investors are losing money, they don't spend. The US Trust survey, in fact, found that those surveyed who are considering changes as a result of falling portfolios are most likely to postpone capital improvements on their homes or cut back on big-ticket purchases.
Yesterday, the New York-based Conference Board, a business research group, said that consumer confidence fell in June, posting its largest one-month fall since Sept. 11. Lynn Franco, director of the Board's Consumer Research Center, blamed soft business conditions and eroding confidence in corporate America in the wake of questionable business practices.
While stock prices have been languishing, housing prices are rising. In the first quarter, some of the hot housing markets showed 20 to 25 percent gains. Yesterday, the National Association of Realtors reported that the median home sale price set a record of $154,600 in May.
"People believe housing prices are more likely to be sustained as opposed to stock prices," says Sung Won Sohn, chief economist at Well Fargo Banks in Minneapolis.
Last week, Mr. Sohn was in Silicon Valley, where high-tech companies have seen their stocks badly battered. But he says that even there, housing prices are on the rise. "People are refusing to accept lower prices, so they simply reduce the available supply," he says.
In recent weeks, the stock market has dropped so far that some analysts believe the prices are reflecting more bad news than they should. "To date, obviously, accounting woes and geopolitical wind shear have pushed stocks lower, notwithstanding super-low Fed funds [interest rates] and evidence of modest US economic rebound," says Robert Barbera, an economist at Hoenig, a stock broker. "That means the prospects for positive earnings surprises are high as we enter this quarter's earnings season."
Yesterday, the stock market showed some signs of a rally, with the Dow Jones Industrial Average up 129 points at 10:30 a.m. in anticipation of some of these better numbers. Less than an hour later, however, the rally began to fade.
Unless stock prices stabilize, there may be a real danger to the economy, especially since the US dollar is now dropping as well. Mr. Zandi of Economy.com worries that foreign investors a mainstay on Wall Street could become frightened as their US investments fall. "If they all ran for the door at the same time, and started to sell Treasury bonds, it would be too much for the economy to bear," he says.
The market's slide comes at a time when policymakers have little room to maneuver, says Zandi. The federal funds rate is 1.75 percent, so there is not much room to lower interest rates. "You don't want to paint too dark a picture," he says, "but there is clearly a risk."