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The Bear Fact: If We're in One, It Could Be a While

November 26, 2000|TOM PETRUNO

In the wondrous days of last February and early March, when technology was everything on Wall Street and no price seemed too high for an Internet stock, there was a simultaneous bull market in novel rationales for what was going on.

Even some of the people who worried about a tech-stock collapse argued that it might not be a big deal to investors, precisely because prices had risen to such amazing heights in such a short period.

That rationale went like this: At its peak of 5,048 in March, the Nasdaq composite index had doubled in just seven months. Therefore, even if the index fell more than 40%--a horrendous bear market by any measure--it would only be back to its levels of the fall of 1999.

How painful, really, could that be?

Well, here we are, with Nasdaq as of Friday down 42% from its March peak. The loss was 45% going into Thanksgiving Day--making this decline the worst since 1973-74--before Friday's 5.4% index rebound in a sparsely attended half-day trading session.

Does it hurt that Nasdaq has, in effect, made no net progress in the last year? Perhaps not to investors who bought in well before that. But ask the person who shifted his or her retirement savings into a technology-heavy stock fund in February or March, at or near the market peak. Or ask the people who paid between $120 and $250 a share 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 in tech, but also many of those who have watched from the sidelines. It's the latter factor that was missing in the argument last winter that a 40% Nasdaq pullback might not mean much.

Peel away every other excuse given, and here's why tech stocks have continued to fall in recent months: Many people are simply afraid to buy.

That is, of course, the reverse of last winter, when many people were afraid not to buy.

Sentiment reversals on this scale aren't unusual. The history of markets (not just for stocks, but for anything humans trade) is filled with examples of panic buying followed by panic selling, of euphoria followed by despondency.

Bullish investors would simply turn that around: Despondency eventually leads back to euphoria, they say. So the best time to buy something--or at least, to buy high-quality assets--usually is when most people are overcome with fear and refuse to step up.


The problem today is that investors' fears are increasingly rooted in fundamental market, economic and political concerns that have the potential to be longer lasting, which means the downward pressure 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 have held up far better than technology.

Consider what investors faced a year ago. The economy was booming, and so were corporate profits. Oil was around $25 a barrel, and seemed to be stabilizing. And though the Federal Reserve had already raised interest rates three times, many Wall Street pros were convinced the central bank wouldn't tighten credit much more.

The main issue a year ago was the Y2K computer bug. But the stock market quickly figured out that Y2K was going to be a major non-event. Hence, share prices rallied in the fourth quarter even as the Y2K doomsday crowd's chorus grew louder.

Today, the economy is unquestionably slowing on many fronts. That, in turn, is showing up in corporate earnings growth, which is markedly decelerating.

The Fed seems in no hurry to begin cutting rates. In the meantime, many banks, hurt by rising loan losses, continue to tighten credit to their corporate customers. In the corporate junk bond market, a surge in defaults this year by deeply indebted bond issuers has caused potential bond buyers to pull back, which has sent the yield on the average junk bond issue soaring to nearly 12%, the highest since 1992.

Oil prices have reached $35 a barrel, and natural gas prices are at record highs. U.S. consumers who have begun to get their winter gas or heating-oil bills should be prepared for major sticker shock. Yet the Organization of Petroleum Exporting Countries seems to be serious 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 East violence need no rehashing here. People may argue whether those crises are hurting the stock market, but they certainly can't be helping the situation.

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