Bull Market

Bull Market

Riding the Bull

It is an understatement to say that during the 1990s the stock market was volatile. On 17 April 1991 the Dow Jones Industrial Average closed above three thousand points for the first time in history. By 1995 the Dow had gained 33.5 percent in value and passed the four thousand mark. In 1997 it reached a high of eight thousand, but began to fluctuate wildly and unpredictably. In late October 1997, for instance, the stock market came as close to crashing as it had in the decade when the Dow plummeted a record 554 points in a single day, equaling 7.2 percent of its total value, only to rebound with a record 337-point rise the following day. At the end of the week the market ebbed and flowed its way to a mark of 7,442.08, a loss of a mere 4 percent in value. Even as it declined, however, the value of stocks remained far greater than it had been at the beginning of the decade. By 1998 the Dow reached nine thousand; it closed the decade near eleven thousand points, with no apparent limits on its ascent. The problem was that no one really knew how the market would perform over the short or long term. Chairman of the Federal Reserve Board, Alan Greenspan, periodically tried to slow economic growth and bring the soaring stock market back to earth by raising interest rates as a hedge against inflation. Greenspan interpreted the "correction" in 1997 as a "salutary event" for a market driven by what he characterized as "irrational exuberance." Although the market continued to rise steadily, and sometimes dramatically, after 1997, many experts feared that its volatility suggested the bottom could drop out at any moment without giving much advanced warning of trouble. After the decline of 1997, David N. Dreman of Dreman Value Management, a New York investment firm, declared "this was a market waiting for a trigger. When all is said and done, this market is still overvalued."

Market Strength

Even with the market hovering around eleven thousand points, apprehensions remained. Yet, during periods of market volatility and decline, there were consistently more signs of economic strength than weakness, at least insofar as investors were concerned. In the midst of the collapse of stock values in 1997, the federal budget deficit fell to $22.6 billion, the lowest it had been since 1974. At the same time, wages rose only 0.9 percent, relieving fears of inflation. Cheaper imports from Asia helped keep prices low in the United States. Finally, when market values tumbled, many companies invested in their own stock. These transactions helped to stabilize and even rally the market. Bert Whitehead, a financial consultant in Franklin, Michigan, referred to the 1997 downturn as the "Dow October Clearance Sale," and urged clients to buy while the price per share was low. Market analyst James A. Bianco of Arbor Trading in Barrington, Illinois, estimated that the Dow would have had to fall below five thousand points before portfolios began to experience any irrecoverable loss in value. The market rallied in 1998, rising during the spring and summer, but losing nearly 17 percent of its value by the fall. Such analysts as Robert J. Samuelson predicted a recession when the market tumbled on 19 April 1999, with such high-tech stocks as AOL, Microsoft, Cisco, and other companies in the Dow Jones Internet Commerce Index losing a record 17 percent of their value in a single day of trading. Yet, by 21 April 1999, the Dow climbed to a record 10581 points. The rally was driven by investors who abandoned technology stocks and put their money into industrial shares. To experts, this long-awaited shift marked a welcome broadening of the market, which many thought had been too concentrated. "The shift is healthy," said John S. Tilson, managing director at Roger Engermann & Associates Inc., an investment firm in Pasadena, California. "The narrow bias that the market had before could have led to something bad happening." Alfred Goldman, chief market strategist at A. G. Edwards & Sons, Inc., added, that "the bears have had another arrow taken out of their quiver." Suddenly many experts wondered whether the market, despite its volatility, might not after all be entering a stronger phase that might continue for a long time.

Permanent Prosperity?

Will the stock market continue to rise, and if so, how far and for how long? Those were questions market analysts asked as the decade drew to a close. Many apparently looked forward to an endlessly prosperous future, believing that the U.S. economy had undergone a fundamental structural change. Edward Yardeni, chief economist for Deutsche Morgan Grenfell, was lyrical in predicting a "new-era economy" driven by information technology, global markets, and world peace that promised to generate unprecedented corporate earnings and continually rising stock prices. Yardeni and others who shared his perspective posited a "long boom," which would carry the economy past all the difficulties and limitations that formerly hampered it. In an essay titled "The Long Boom" published in Barrons in 1997, Peter Schwartz and Peter Leyden took readers on a journey through a twenty-first century economy so affluent that the problems of poverty and war simply disappeared. "We are watching the beginnings of a global economic boom on a scale never experienced before," Schwartz and Leyden intoned. Yardeni, Schwartz, and Leyden provided flamboyant visions; more sedate, mainstream economic and market analysts also asked whether the economic successes could be sustained. Everyone agreed that, given previous assumptions, the performance of the economy during the second half of the 1990s was remarkable, unprecedented, and nothing short of incredible. They disagreed, though, about whether these accomplishments were a portent or temporary phase. Crucial questions remained. Can Americans safely assume that stock prices will continue to soar, that unemployment will continue to decline, and that inflation will continue to recede? No one was certain. Those who argued for the "long boom" based their projections on the extraordinary performance of the U.S. economy, which since 1994 exceeded nearly all predictions and expectations. Optimists thus insisted that the economy had at last solved its persistent structural problems. Sustained growth, they insisted, would no longer create shortages in labor and raw materials, would no longer tax the productive capacity of industry, and would therefore not bring the higher wages, costs, and prices that traditionally slowed economic growth.

The Economic Future

Critics of this scenario suggested that changing demographics of the United States would frustrate the "long boom" prosperity. Between 1945 and 1973 the economy grew at a rate of 3.5 percent a year, Much of that growth resulted from an unusual surge in U.S. population: the arrival of the "baby boomer" generation. In 1963 only 38 percent of the population was in the workforce; by 1998, however, more than 50 percent worked. In 2010, when the oldest members of the baby-boomer generation begin to retire, there will be fewer young workers to replace them. Scholars project that the labor force will grow at a rate of about 0.9 percent per year between 1999 and 2010. Projections of the Social Security Administration show the annual growth rate of the labor force falling around 2020 to 0.2 percent because of lower birth rates in the latter decades of the twentieth century. Even if all the other calculations of the "long boom" theorists prove correct, critics maintain that a shortage of workers will eventually reverse the sustained economic-growth model. Proponents of the "long boom" respond that if the United States can no longer count on favorable demographics, it can, because of technological innovations and advancements, still anticipate increased productivity. They point to the success of such companies as General Electric (GE) and Chrysler, both of which increased productivity through the judicious use of new technology. There is little evidence, however, that the economy as a whole is following the example of GE and Chrysler. Since 1975, the productivity growth rate has been slightly more than 1 percent a year, with virtually no upward trend apparent by the end of the 1990s. Incredible as it may seem, considering the massive changes that took place in the U.S. economy, most scholars agreed that the overall rate of productivity growth experienced no substantial transformation. Individual success stories notwithstanding, studies showed that companies that downsized or turned to computer technology often did not realize any lasting increase in productivity. There also seems to be no definitive statistical evidence to suggest an aggregate increase in productivity. The greatest gains in productivity came in the manufacturing sector, but because it became so productive, these firms employed an ever diminishing percentage of the workforce, declining from 31 percent in 1960 to 15.8 percent by 1995. This decline is expected to continue into the twenty-first century. According to statistics compiled by the Bureau of Labor Statistics and the International Monetary Fund, only 10 percent of the U.S. workforce will be employed in manufacturing by 2017. Since the 1960s there has been a continual exodus of U.S. workers from highly productive manufacturing jobs to less productive jobs in the service sector. Given these considerations, many economists believe that it is unwarranted to expect the phenomenal economic growth and prosperity to continue indefinitely.

Sources:

Adam Bryant, "They're Rich (And You're Not)," Newsweek, 134 (5 July 1999): 36-43.

Ann Reily Dowd, "The Panic of '98," Kiplingers Personal Finance Magazine, 52 (July 1998): 24-25.

Fred Hirsh and M. J. Rossant, Social Limits to Growth, iUniverse.com, 1999, Internet website.

Jeffery M. Laderman, "The Case for Dow 10,000," Business Week (7 December 1998): 124-125.

Laderman and Marci Vickers, "A Wiser Bull?," Business Week (3 May 1999): 38-41.

Philip J. Longman, "Is Prosperity Permanent?," U.S. News & World Report, 123 (10 November 1997): 36-39.

Bill Powell, "The Globe Shutters," Newsweek, 130 (10 November 1997): 30-34.

Jane Bryant Quinn, "What Should You Do?," Newsweek, 130 (10 November 1997): 36-38.

Robert J. Samuelson, "The Crash of '99?," Newsweek, 132 (12 October 1998): 26-31.

Peter Schwartz and Peter Leyden, "The Long Boom," Barrons, 77 (September 1997): 17-19.

Allan Sloan, "Reality Bites" Newsweek, 130 (10 November 1997): 39-43.

Anne Kates Smith and James M. Pethokoukis, "The Bucking Bull," U.S. News and World Report, 123 (10 November 1997): 26-32.

Suzanne Woolley and Jeffery M. Laderman, "How Worried Should You Be?," Business Week (17 August 1998): 30-33.