U.S. Investors Feeling Jilted Over Losses in Stock Market

By WALTER HAMILTON

March 4, 2001 12 AM PT

TIMES STAFF WRITER

Tim Martin’s love affair with the stock market is over.

After racking up huge gains in the bull market of the late 1990s, the Los Angeles man figures it will take at least a decade to recoup the “devastating losses” he has suffered as the Nasdaq Stock Market has plunged over the last 12 months.

That is, if he ever puts his money back into the market. Right now, he wants nothing to do with it, after watching such former technology stock stars as CMGI Inc. and PSINet lose more than 95% of their values.

Martin, 37, recently sold almost all of his stock holdings and says he doesn’t even bother to open his monthly brokerage statements when they arrive in the mail.

“At one point I was one of those Nasdaq dreamers who thought I was literally a few months away from being a multimillionaire,” Martin said. “I saw the gold pot at the end of the rainbow, and then right before my eyes, it was obliterated.”

It was a year ago this week that the tech-stock-dominated Nasdaq hit its peak, then fell into what is threatening to become the worst U.S. market collapse since the Depression.

And as Nasdaq has shriveled, so has Americans’ infatuation with stocks.

The history-making 1990s bull market had spawned a nation of rabid investors who, when they weren’t trading stocks online, were daydreaming about how they’d spend their riches.

Egged on by a decade of market gains and by companies’ increasing shift to employee-directed retirement savings accounts, an estimated 52% of U.S. households now own stocks in some form, up from fewer than a third in 1989.

And for many people, the technology stocks that lead Nasdaq--names like Cisco Systems, Intel and Dell Computer--were not only the glittering symbols of the vaunted “New Economy,” but also the surest path to investment success in the late ‘90s, as their prices rose seemingly nonstop.

But since cresting the 5,000 mark March 10, the main Nasdaq stock index has collapsed under the weight of a slowing economy, crumbling tech company earnings and the element of sheer fear: Many people who piled into the stocks at any price as they soared now are bailing out, also at any price, to preserve some profit or avoid worse losses.

The index has sunk 58% thus far, slashing $4 trillion from the U.S. stock market’s total value.

But as severe as the losses have been, one casualty may loom even larger: the “cult of equity” that developed among average Americans--a fascination with, and trust in, the stock market.

If that trust is fading, the implications for the market, the economy and Americans’ personal finances may reach far into the future, experts say.

The most immediate victim of plunging stocks is the infrastructure that grew up around the bull market: Online stock trading has plummeted. Financial network CNBC has lost viewers. Investment club membership has declined.

The changed thinking is apparent on Internet investment message boards. Gone are the once-bullish screen names that investors had used to banter about stocks. In their place are such aliases as “afraid-to-trade” and “sorry-to-hear-about-your-stock.”

“The drop in the market and the absence of automatic gains that people had gotten so excited about certainly has led to a drop in interest in the stock market,” said Jeremy Siegel, a finance professor at the University of Pennsylvania. “Clearly, for many people it’s a painful memory that they would prefer to not bring up.”

Broader indexes such as the Dow Jones industrial average also have slumped as the economy has softened. But by far the worst damage has been inflicted on Nasdaq, the onetime epicenter of New Economy hype.

The Nasdaq peak last March came just one day after it first closed above 5,000, in what seemed to be a glorious punctuation mark to the record-setting bull run. In just five years, the Nasdaq index had rocketed more than 500%. Technology companies, especially those tied to the Internet, were widely viewed as having limitless growth potential that justified sky-high prices for their stocks--even though many of the companies weren’t yet profitable.

There was no shortage of analysts warning a year ago that Nasdaq had become a dangerous speculative bubble. Yet small investors continued to pour into the market. Cash flowing into stock mutual funds hit a record $53 billion in February 2000, with most of the money going into growth-stock-oriented funds.

Many investors said at the time that they were prepared for a market pullback. And some still insist they aren’t surprised by the magnitude of technology stocks’ declines.

Bill Anon, 49, a partner at a Los Angeles accounting firm, said he has been investing for about 10 years. “I’m concerned, but I’m not surprised,” he said of the market’s drop. “We’re coming off the longest strong economy we’ve ever had. A fall was inevitable.

“Internet and high-tech stocks bubbled so much. Everything has been out of whack.”

But financial bubbles, when they burst, often are underestimated in terms of the damage they produce and the time it takes to repair that damage. That was the case with the Texas oil and gas bubble of the 1970s and early ‘80s; the savings and loan crisis of the late 1980s; and the Japanese stock market bubble, which burst in 1990.

Indeed, Japan’s market never recovered; last week it hit new 15-year lows.

Likewise, in the aftermath of California’s severe 1990-91 recession, it took until the middle of last year for Los Angeles County median home prices to recover to their former peaks.

Though the U.S. stock market decline is just a year old, some experts fear that the economic damage could be far longer lasting.

With stocks accounting for the largest share of Americans’ financial assets (that is, savings other than home or business equity) since the late 1960s, extensive damage to the psyches of consumers could crimp investment and spending over a prolonged period.

Historically, the stock market has risen or fallen according to the health of the economy. But the stock market’s climb, led by Nasdaq, was so powerful in the late 1990s that it actually boosted economic growth during the period.

Federal Reserve Chairman Alan Greenspan believes the economy’s growth rate was raised 1 percentage point a year in the late 1990s, thanks to the “wealth effect” people felt from the booming stock market.

What’s more, investors’ ravenous appetite for stocks made it easy for companies to raise money that they spent on everything from office furniture to employee salaries. Many companies freely handed out stock options that surged in value and further boosted workers’ spending.

As some analysts put it, the tail (the market) was wagging the dog (the economy).

Now, the swift erosion of consumer confidence to multiyear lows in recent months, tracking the Nasdaq market’s dive, has raised fears that a “reverse” wealth effect is worsening the economy’s slowdown: People are feeling poorer, and therefore spending less.

Martin, for example, has shelved plans for a house, a new car and a family vacation.

“I wanted to take them [the family] to Hawaii. Now it’s like, El Segundo,” he said.

Because consumer spending accounts for two-thirds of U.S. economic activity, a sustained market slide could trigger a recession if consumers retreat, some experts say.

“Economic interest in the stock market on average is greater than it’s ever been,” said Nancy Koehn, a business historian at Harvard Business School. “People now believe that what happens in the market is critically important to our daily lives.”

Of course, not every family had bet its entire savings on technology stocks. But small investors like Seth Stoney, 38, of Mission Viejo, clearly had become a driving force of Nasdaq’s boom.

Stoney owns shares in Cisco, chip maker Texas Instruments and software giants Microsoft and Oracle, and has been investing for almost seven years.

“I’m not touching anything,” he said. “It makes me cringe to see the market drop, but there’s nothing I can do. I’m in it for the long haul.”

Yet analysts warn there is no telling how long it could take for many battered stocks to revive.

In historical terms, Nasdaq’s collapse is one of the worst ever for a broad-based stock index, but it has similarities and differences with past market squalls.

The blue chip Standard & Poor’s 500 index fell 48% in the brutal 1973-74 bear market, the worst since the 1930s amid the Great Depression. Nasdaq sank 60% in 1973-74, but the index was only three years old and was loaded with mostly tiny companies.

After the 1973-74 plunge, it took the S&P; seven years just to climb back to its 1973 peak.

In the crash of 1929-32, the Dow Jones industrial average plunged 89%. Many technology stocks today have recorded losses of that magnitude.

Barring a global catastrophe, however, Nasdaq’s modern day drop will be nowhere near as dire economically or socially as the market’s 1929 collapse, most experts say.

In one of many differences, virtually all stocks collapsed in 1929. Though the broader S&P; is down about 20% today from its peak a year ago, technology and telecommunication stocks have absorbed the brunt of the damage.

Indeed, some experts argue that the technology sector’s plunge is merely a much needed purging of wild speculation that will ultimately be healthy for the market.

“When stocks go back up, they’ll go up for the right reasons,” meaning sound business fundamentals, said James Angel, a Georgetown University finance professor.

Yet there are similarities between the markets of the 1920s and the 1990s.

As with today’s glee about the Internet, 1929 was full of optimism about a supposedly new economic era, said Richard Sylla, a professor of financial history at New York University.

Productivity was rising, and investors were excited about such advances as widespread use of cars and electricity, and the introduction of talking movies, Sylla said.

“The ‘20s and the ‘90s are quite similar in what happened and in how people viewed it at the time,” Sylla said.

But, as with the Internet bubble, there was little regard in the 1920s for the practical applications of the era’s innovations in business and society, Harvard Business School’s Koehn said. Like so many dot-com companies today, loads of businesses failed in the early 1900s, even though the era’s technological improvements were profound.

In both periods, investors eventually looked back and wondered whether they had been party to a massive self-delusion and misallocation of capital.

Wall Street raised a gargantuan $52 billion via initial public stock offerings of young companies last year, amid unprecedented demand by glassy-eyed individuals. Many of the stock offerings were technology related and have since plummeted.

That capital was directed away from truly deserving projects, critics say. In California, for example, no major electric power plants have been built in the last decade.

Still, many investors today insist they will stick with technology stocks.

“People aren’t going to make any 1929 decisions,” investor Anon says. “They’re going to sit and wait.”

In fact, small investors have been credited in recent years with holding fast through market hiccups. But many people have never sustained such fierce losses as over the last year.

In 1973-74, there was an exodus of individual investors out of stocks, said Edward Wolff, a New York University economics professor.

Small investors crowded into stocks during the lengthy bull market of the 1960s, Wolff said. But while the S&P; 500 skidded 34% between year-end 1968 and year-end 1974, the portion of Americans’ financial assets in stocks declined by 59%, according to Wolff’s calculations.

“That was a period when the middle class really left the market in droves,” Wolff said.

Today, however, the market presents investors with a Catch-22: While their losses have sapped their enthusiasm for stocks, the reality is that many Americans simply can’t afford to shun the market.

As do-it-yourself 401(k) plans have replaced traditional pensions in the last decade, baby boomers have been reared on the notion of fiscal self-reliance--and they’ve been counseled that the stock market is the best place for their retirement savings.

In fact, if easy stock gains are a relic of the past, some experts predict that individuals actually may have to pay closer attention to the market.

Add to that the fact that some of the people who may most want to tune out the market are the ones who still are heavily invested. They didn’t sell when stocks began tumbling a year ago, and many “bought the dips” throughout last year. Now, they’re holding on simply because their stocks are worth so little.

Jeffrey Lowy, a 37-year-old music attorney from Calabasas, thought he was smart in November when he bought heavily after Nasdaq had already fallen 33%. Chastened, he’s now thinking about investing free cash in apartment buildings.

“Someone just came into my office and said, ‘Have you seen JDS Uniphase now?’ ” Lowy said, referring to a once highflying fiber optic stock. “And I said, ‘You know what, I’m not going to look at it for 10 years. I just don’t care.’ ”

Beyond financial losses, Nasdaq’s cratering has affected many people on a deeper level.

As companies have slowed their hiring, Bill Josephson has seen business decline at the executive recruiting firm he owns. But the sharp drop in his stock portfolio--which includes fallen telecommunication stars Qualcomm and WorldCom, as well as a tech-stock mutual fund--has made him feel pressure to find ways to boost his income.

“Every deal I’m working on I start to feel the pressure that, ‘Gee, this one really needs to get done,’ ” said Josephson, 48, of Andover, Mass.

His decision to load up on technology stocks in recent years has left Josephson second-guessing himself--and worrying about how he’ll finance college for his children and retirement for him and his stay-at-home wife.

“Your family’s counting on you to make good decisions and to be successful and achieve, and you’re counting on that, too,” he said. “And when you fail . . . it definitely impacts you. It adds to the pressure--and it’s self-imposed pressure.”

Anxiety over his losses has at times left Josephson moody and short-tempered, he said. He worries that he can’t help but transfer some “collateral pressure” onto his family.

Yet he takes solace when he thinks of several friends who planned to retire early--before they suffered even greater stock losses than he has.

“Now I hear people saying, ‘I may be working longer,’ ” he said.

Times staff writer Sarah Hale contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Nasdaq’s Boom and Bust . . .

Nasdaq composite stock index, 1995-2001:

Friday: 2,117.63

. . . Remind Some of Japan’s Market Crash

Nikkei-225 stock index in Tokyo, 1986-1992:

December 1992: 16,924.95

‘Reverse’ Wealth Effect? With Americans Again Loaded Up With Stock . . .

Stocks as a percentage of U.S. households’ financial assets, end of each year, 1960-2000: