- The Washington Times - Tuesday, January 1, 2002

The stock market made a strong comeback after the September 11 terrorist attacks but failed to recoup a long string of earlier losses, leaving the major indexes down for a second straight year in the poorest showing in a generation.
"New economy" technology stocks took the biggest hit, with the Nasdaq Composite Index dropping an additional 21 percent last year after plummeting 39 percent in 2000. Tech stocks were the darlings of investors during the economic boom of the 1990s, when they enjoyed spectacular yearly gains that topped out with the Nasdaq's 89 percent rise in 1999, a record for any stock index.
The "old economy" stocks that inhabited the Dow Jones Industrial Average never boasted such extraordinary returns but suffered milder losses last year by comparison, declining by 7 percent after a 6.4 percent drop in 2000.
The blue-chip Standard and Poor's 500 index, reflecting the woes of large multinational corporations in a world recession, fell 13 percent last year after a 10 percent loss in 2000.
In keeping with the tone for the year, selling by investors seeking to post losses for tax purposes drove down the indexes in the final day of trading yesterday. The Dow fell 116 points to 10,021, and the Nasdaq shed 36 points to close at 1,951.
With the 2000-01 bear market now in many ways surpassing the deep bear market of 1974-75, most stock analysts believe the worst is behind and that the market can look forward to a year of growth, bolstered by a recovering U.S. economy.
"We think the S&P; 500 and Nasdaq will see double-digit gains over the course of 2002," said David M. Blitzer, chief investment strategist with Standard & Poor's. But "stocks face some formidable hurdles" from the lingering recession and traumas of last year.
"The risk of additional terrorism and fresh memories of the market's 18-month downward spiral are inhibiting buying," he said.
With so many companies reporting losses rather than profits last year, stocks even at today's low prices seem expensive to many investors, he said. Dismal fourth-quarter earnings pre-announcements in the last month confirmed that the recession's drain on profits had not abated.
"But we expect that these and other impediments will be overcome," Mr. Blitzer said. "Market recoveries that proceed in halting fashion amid widespread skepticism often are the most sustainable."
Mr. Blitzer and other Wall Street gurus believed a new bull market started on Sept. 21, when major indexes hit three-year lows on the first day of trading after the terrorist attacks. The torrent of selling that day was characteristic of the final climactic "capitulation" of a bear market.
Even assuming the bear market ended that day, the 2000-01 bear market was one of the deepest and longest in U.S. history. The losses from the market's peak in early 2000 to Sept. 21 eclipsed losses from the 1987 stock market crash, which lasted six weeks. The Nasdaq's 70 percent drop by far exceeded any index's losses in the 1974-75 bear market, when the Dow dropped 48 percent.
Despite the wrenching adjustment of the last two years, Greg A. Smith, chief investment strategist with Prudential Securities, does not see an easy year ahead for the market.
"I see a challenging year with modest upside potential" on returns, which will average below 10 percent, he said.
Mr. Smith sees a danger that the poor performance of stocks could increasingly drive investors out of the market and into other investments such as housing, where prices boomed in the last two years even as stocks declined. Individual investors have been taking more money out of mutual funds since July than they have been putting in, suggesting that some are deserting the market.
Although earnings growth should return this year, Mr. Smith said, lasting damage from the terrorist attacks, including increased corporate spending on security and insurance with no commensurate increase in profits and productivity, will hold growth below the double-digit levels investors came to expect in the 1990s.
A dimming of capitalism's popularity after the world turned enthusiastically to the American economic model in the 1990s after the fall of the Berlin Wall will combine with an increased penchant for regulation of such products as prescription drugs to further dampen earnings growth and the outlook for the market, he said.
The market could tumble again this year if investors suddenly realize that ebullient earnings growth will not return, he said. But more likely the market will simply trade sideways as the reality of smaller returns gradually sinks in.
Even as it struggles to get ahead, the U.S. market offers more promise than many foreign markets because of the strong dollar and the resilience of the economy here compared with the rest of the world, Mr. Smith said.
Small companies that do most of their business here will be the best candidates for strong growth, as companies operating internationally will continue to suffer from depressed global conditions.
L. Douglas Lee, president of Economics from Washington, an economic-forecasting firm, said investors and pundits may be short-changing the U.S. economy and discounting the potential for an explosive recovery from recession this year.
The market's downfall has been mostly a result of the bursting of an unsustainable bubble in tech stocks, and although that caused considerable damage, the underlying economy remains sound and is due for a strong rebound thanks to the lowest interest rates in a generation and $150 billion of increased spending and tax cuts passed by Congress, Mr. Lee said.
"The U.S. economy will continued to impress and amaze investors," he said.


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