After a Panic, Investors Return
Two emotions are said to rule financial markets: fear and greed.
But 2001 on Wall Street may be better remembered as the year of fear and hope--in that sequence.
For most of the year, major stock indexes were in decline, extending the slide that began in March 2000. Despite strong rallies in January and in the spring, the Standard & Poor’s 500 index and the Nasdaq composite lost ground in five of the year’s first eight months.
Fear of recession and sinking corporate profits repeatedly overwhelmed hopes that an already long bear market might be nearing its end.
August was particularly brutal: Stocks plunged amid rising concern that a recession had become inevitable. The Federal Reserve had cut interest rates seven times, including on Aug. 21, but a new barrage of profit warnings from major companies dashed investors’ hopes that the Fed’s medicine would work.
The S&P; index sank 6.4% in August and the Nasdaq index dived nearly 11%. In the first week of September, the S&P; fell an additional 4.2% and Nasdaq slumped 6.5%.
When the market closed on Monday, Sept. 10, the primary view on Wall Street was that deeper declines were ahead for share prices. The only question seemed to be just how bad things would get.
But those worries became nearly inconsequential on the morning of Sept. 11. Anyone who thought they knew fear before that day learned that they could feel it on an entirely new level.
Concerns about one’s money, or livelihood, or retirement were transcended by a fear that Americans’ way of life itself was under attack. In that light, what was happening on the stock market ticker tape became a minor issue for most people, if it was an issue at all.
When markets resumed trading on Sept. 17, most investors were braced for a sell-off, and that’s what they got: The Dow Jones industrials dived a record 684.81 points, or 7.1%. The market dropped every session that week, and for the entire period the Dow fell 14.3%, its second-worst one-week loss ever.
By that Friday, panicked selling had driven every major index to a three-year low. The technology-heavy Nasdaq composite index had lost nearly three-quarters of its value from its all-time high, reached on March 10, 2000.
But that marked the end of the panic, which had clearly been driven by institutional investors rather than small investors. Stocks began to rebound on Sept. 24, and that has been the story since. Major indexes have risen in 10 of the last 14 weeks. The Dow, at 10,136.99 on Friday, is up 23% since Sept. 21. The S&P; 500 is up 20%, and the Nasdaq composite has surged 40%.
What we’ll never know is whether the attacks merely accelerated whatever market decline would have occurred anyway, just over a longer period.
In any case, hope again has replaced fear on Wall Street--hope for an economic recovery in 2002, for a revival in corporate profits, and of course, hope that the forces that were hell-bent on destroying America have been or will be soundly defeated.
In its usual fashion, the market turned around well before the public mood overall turned. Stocks were rising before the military campaign began in Afghanistan.
The market’s seeming prescience about the war effort--that it would go as well as it has for the West--has been reminiscent of what happened before the war against Iraq began in January 1991. Stocks fell into a bear market after Iraq’s invasion of Kuwait in early August 1990, bottomed in October of that year, and were rallying in November and December, even as the U.S. massed forces for the conflict.
If confidence about a U.S. victory over terrorism helped spark the latest rally, most analysts believe that the advance has been sustained by growing confidence that the economy will in fact rebound next year.
Whether the market really sees the future is a metaphysical question that can be debated but never answered. What we do know from history is that stock prices, collectively, have a very good track record of predicting economic recoveries.
But a “very good” record doesn’t mean the market is infallible. Just ask those investors who bought into last spring’s brief rebound. The Nasdaq index soared 41% between April 4 and May 22, before beginning another extended decline.
Despite the rally since Sept. 21, the equity market overall is headed for its second straight losing year. The S&P; 500, which fell 10.1% in 2000, is down 12.1% this year with one trading day to go. Nasdaq, which plunged 39.3% in 2000, is off 19.6% this year. Those aren’t minor losses.
The last time stocks suffered back-to-back calendar-year losses was 1973-74, the era of the first big energy-price shock, rising inflation in general, a long recession and President Nixon’s resignation.
At the market bottom in 1974, fear of the future was rampant--not unlike what many investors felt in the immediate aftermath of the terrorist attacks.
When share prices rallied early in 1975, skeptics abounded. But the market was correctly foretelling new growth for the economy and for corporate profits.
What the rally since Sept. 21 is foretelling, if anything, will become evident only with time.
Yet the rally at least suggests that more investors have hope for the future. And the presence of hope shouldn’t be underestimated: It is, after all, the key ingredient for ending recessions and bear markets. Hope gives people the confidence needed to take risks. Without risk-taking, the economy can’t grow, and the stock market would stagnate, or worse.
By definition, not everyone who takes risks can win, and sometimes they can lose, and lose a lot. But just as those who take no risks guarantee that they’ll be protected from loss, they also ensure that they can’t win big.
Americans often have been viewed by the rest of the world as too optimistic, too hopeful, not skeptical enough. If it’s true, it’s also a key reason the nation stands as the greatest economic power the world has ever known.
The stock market, since Sept. 21, is saying that hope for the future isn’t misplaced. The economy probably could recover even without the market’s encouragement, but it certainly can’t hurt.
*
Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web go to: www.latimes.com/petruno.
