ECONOMY Effects of market's decline are widespread
The nation's stock markets have lost $5.5 trillion in value in the past 27 months.
CHRISTIAN SCIENCE MONITOR
NEW YORK -- In March 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 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 U.S. government spends annually. On a dollar basis, the nation's loss of wealth is greater than all the other U.S. 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. Policy-makers are watching nervously.
"This tremendous loss of wealth is a weight on the economy," says Mark Zandi of Economy.com, an economic Web site. "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 by U.S. Trust Corp. 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.
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.
Housing prices increase
While stock prices have been languishing, housing prices are rising. In the first quarter, some of the hot housing markets showed 20 percent to 25 percent gains. 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 Wells Fargo Banks in Minneapolis.
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 U.S. economic rebound," says Robert Barbera, an economist at Hoenig, a stockbroker. "That means the prospects for positive earnings surprises are high as we enter this quarter's earnings season."
Unless stock prices stabilize, there may be a real danger to the economy, especially since the U.S. dollar is now dropping as well.
Zandi of Economy.com worries that foreign investors -- a mainstay on Wall Street -- could become frightened as their U.S. 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.