In 2000, the US equity markets had a harsh awakening from their "irrationally exuberant" reverie.
Investors in many so-called 'new economy' stocks were coming face-to-face with the cold reality of disappointing quarterly results and slowing growth in the wider economy.
On March 10, the Nasdaq index, barometer of the new economy, peaked at 5,048.62 points after a dizzying climb. One month later, investors were swapping their Dom Perignon champagne for Pepto Bismol indigestion tablets, as the tech-heavy index experienced the worst-ever week in its 30-year history, plummeting 25 percent.
The Internet bubble — when any firm with that magic "dot-com" after its name had found it easy to attract capital — had burst.
On December 22, with just four trading days left in 2000, the Nasdaq closed at 2,517.02 points, or 38 percent down from December 31, 1999 and half its record level of March. Absent a miraculous gain before the year's close, the Nasdaq will have known its worst year since 1974.
The Dow Jones Industrials Average index (based on the stock prices of 30 large and actively traded US companies) also had a roller-coaster year, but riders suffered less whiplash, as the peaks and trough were less extreme than on the Nasdaq.
The DJIA index closed Friday, December 22, down 7.5 percent from year-end 1999, and off 9.3 percent from its record high of January 14, 2000.
Until the early months of this year, a stock-market strategy had seemed simple: buy all you can, as soon as you can, so as not to miss out on the bonanza.
On the basis of rose-tinted earnings projections, companies without histories were plied with money in spectacular stock market flotations.
One year ago, VA Linux — which provides hardware and software for the Linux operating system — saw its share price explode in an initial public offering on the Nasdaq, ending the first day of trade 700 percent higher.
In January, America Online, an Internet portal that was developed eons — or 15 years — ago, acquired the 80-year-old media giant TimeWarner for around 155 billion in stock thanks to a market capitalization (the number of shares on the market multiplied by their price) that had ballooned out of proportion to AOL's concrete results.
The deal was one of the biggest mergers in US history.
However the market's about-turn has in some respects merely anticipated by several months the slowdown of US economic growth suggested by the data towards the close of this year — and a raft of profits warnings from companies.
After nearly 10 years of steady growth with low inflation — an economist's dream scenario — the US economic machine is slowing down and shifting gears.
Gross domestic product grew by an annualized 2.2 percent in the third quarter of 2000, its most modest increase in four years and a far cry from the 5.6 percent annualized GDP growth in the second quarter and the 4.8 percent in the first.
Traders and analysts are looking to the Federal Reserve and its chairman Alan Greenspan to loosen up on the monetary reins, after six interest rate hikes between June 1999 and May 2000.
In December 5 remarks, Greenspan intimated lower interest rates could be on their way as the US economic growth continued to slow "appreciably." A December 19 meeting of the Federal Open Market Committee also supported a rate decrease, noting that the risks of a downturn now appeared to outweigh the risks of higher inflation — a major shift in the Fed's thinking.
The committee is scheduled to meet next on January 30 to 31.
Since the beginning of the 1970s, the Standard and Poor 500 — offering a broader market perspective than the Dow Jones and the Nasdaq composite index — has climbed an average of 23.6 percent in the 12 months after each rate cut by the Fed, according to analysts at Merrill Lynch.
In the New Year, therefore, many equity market investors here will be on the watch for the first glimmer of a relaxation of interest rates.— (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)