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Markets & Stocks
Wall Street's wild year
December 22, 2000: 11:59 a.m. ET

The 'Net lost its thunder and markets withered. Are the good times over?
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - It wasn't so long ago, really. You probably remember the days when Web-savvy Generation X'ers became paper millionaires, corporate profits fattened mightily, and technology stocks seemed unstoppable, leaving so-called "old economy" companies in the dust and pushing the Nasdaq stock market above the 5,000-point barrier.

That was nine months ago. And if it seems like a woozy memory now, that's not surprising. The year 2000 wraps up as one of the most tumultuous years Wall Street ever has weathered, from the Internet stock meltdown in the spring to the fall presidential election's bizarre and protracted denouement that thrust already fragile markets in limbo for more than a month.


Click here to see the year's final numbers


The year began with investors fueling a stock buying frenzy, but it ends with a market that's been whipsawed and growing warnings that the country could be on the verge of a recession.

After a spectacular 85.6 percent surge last year, the Nasdaq composite has tumbled more than 50 percent from its March all-time high of 5,048 putting it on pace for what could be its worst performance since its inception in the early 1970s. The Dow Jones industrial average and the S&P 500 also appear set to close lower, marking the first time in a decade that all three major indexes would finish the year in negative territory.

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  A lot of people expect that finally, and unfortunately, the good times have pretty much come to an end.  
     
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  James Schippers
financial adviser
 
As the year progressed, economists began using a word that virtually had disappeared from the American lexicon a slowdown as the Federal Reserve's six interest rate increases since June 1999 gradually took their toll. Tighter credit and muted consumer confidence dented virtually every industry, from automakers to retailers to all of those low-cost online trading firms that sought to capitalize on the investing boom.

And the once-invincible technology sector showed that it too is vulnerable to the effects of an economic downturn.

Above all, this was a year when Americans' expectations of double-digit stock market gains, of a bountiful supply of mushrooming IPOs, of lucrative Internet jobs brimming with stock options and all kinds of free perks -- shrank back down to size. After a historic bull run in the 1990s, investors are coming to terms with the fact that markets don't always behave themselves.

graphic"A lot of people expect that finally, and unfortunately, the good times have pretty much come to an end, and we're going to be in for some rough periods," said James Schippers, a financial adviser in Chatham, N.J.

Of course, not all investors did so badly. The fixed-income market benefited from the turbulence in the equity markets and the flight to safe havens. And those who invested in some of the blue-chip sectors that many spurned last year drug companies, food manufacturers, energy companies and cigarette makers also fared well.

But investors who bought into the promise of the New Economy at the height of the tech sector's ascendancy saw their losses mount. As the Nasdaq market slid this past spring, technology investing became like "catching a falling knife," said Michael Carty, a stock market strategist at New Millennium Advisors in New York. "You either catch it by the handle or by the blade."

The tech wreck

At the beginning of the year, things couldn't have looked better. In January, corporate America was giddy about the power of technology, after licking the Y2K computer bug problem and digesting America Online Inc.'s (AOL: Research, Estimates) brash acquisition plans for Time Warner Inc. (TWX: Research, Estimates), the parent of CNN and CNNfn. The deal, the first mega-merger of the Internet era, seemed to signal a coming-of-age for the burgeoning Web economy, putting other old-line companies on notice that Internet companies were on the prowl.

But it didn't take long for the tech sector to learn it wasn't foolproof.

graphicThe AOL-Time Warner pact took nearly a year to receive regulatory clearance, with the government demanding significant concessions to safeguard against a monopoly. By the time the deal received Federal Trade Commission approval earlier this month, its value had sunk to about $89 billion from $164 billion, following a steep drop in AOL's share price.

Also this year, a federal judge found Microsoft guilty of antitrust violations, and ordered the company to break up. But that wasn't the end of the software maker's woes. Microsoft (MSFT: Research, Estimates), as well as Intel Corp. (INTC: Research, Estimates), Apple Computer (AAPL: Research, Estimates) and many other tech bellwethers, warned that financial results wouldn't live up to expectations as demand for personal computers slacked off.

After a flurry of activity in 1999, initial public offerings slowed considerably by year's end, while Internet companies that had only recently gone public floundered, shuttered and laid off thousands of workers.

Stock in "name-your-own-price" Web discounter Priceline Inc. (PCLN: Research, Estimates) plummeted 98 percent from its highs as Wall Street drew increasingly skeptical of its business plan. Eighty-something Web entrepreneur C. Everett Koop, the former U.S. surgeon general, saw his drkoop.com (KOOP: Research, Estimates) bleed more and more red ink. E-commerce sites such as Furniture.com and MotherNature.com called it quits. Even the Pets.com sock puppet got sacked.

graphic"The further we get away from it now, the crazier it seems," said Patty Beron, a one-time worker at an Internet startup who now runs her own Web site, SFGirl.com, and helps sponsor "pink slip" parties in San Francisco for laid-off dot.com workers seeking new employment. "Working at a startup was like working no place else. There's no organization. Every week your plan changes, projects you work on for months get thrown out."

Cliff Sharples, CEO of gardening supplies Web site Garden.com, saw his paper wealth shrivel from about $12 million at the stock's highest levels to $20,000 today. Fifteen months after its $49.2 million IPO, the Austin, Texas-based company is out of money, closing up shop and selling its assets, from its trowels to its URLs.

"It's a misperception of the Internet industry to think that everyone became millionaires," said Sharples, a 37-year-old information technology expert who co-founded the Web retailer five years ago. "There is this tendency to look at everyone in this industry in aggregate that it was all twenty-somethings who duped the venture capitalists and squandered it all away while picking out a few million for themselves in an IPO."

Meanwhile, the demise of many dot.com companies has shaken people's confidence in the start-up culture, says John Challenger, of the job placement firm Challenger, Gray & Christmas Inc. Largely because of escalating Internet layoffs, the number of total U.S. job cuts during the past five months has averaged more than 51,000 per month, up from about 40,000 per month from January to June, he said.

graphicAs much as Internet companies were about the prospect of making money, they also represented idealism and breaking the old rules of the corporate boardroom a "classic youth movement," he said.

"I do think it's had a real impact on the work place," Challenger said. "Hopes were embodied in many of the dot.coms many of which were unrealistic."

Warning signs

The Internet sector wasn't the only sector that ran into trouble. As the year went on, higher interest rates raised fears of bad debt throughout the banking industry and retailers felt the pinch as consumers slowed their spending. For many "old-" and "new-economy" businesses alike, profits began to show signs of weakness amid higher borrowing costs, the energy crunch and the impact of the weak euro overseas.

So why didn't we see all of this coming? There certainly were plenty of warning signs that the good times wouldn't last forever, notes Steve Cochrane, a senior economist at Economy.com, a forecasting and consulting firm in West Chester, Pa.

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  Every year it seemed like the economy could brush off whatever problems it encountered and get back up on its feet and keep charging  
     
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  Steve Cochrane
senior economist
Economy.com
 
But, he said, most economists shied away from forecasting a significant slowdown because the economy always had shrugged off previous warnings.

"Every year it seemed like the economy could brush off whatever problems it encountered and get back up on its feet and keep charging," he said.

Like the broader economy, the stock market also seemed to brush off periodic bouts of worry. It had become routine that whenever stocks wavered, people would take advantage of the volatility to buy on the dips and send shares higher.

But on Friday, April 14 just a little more than a month after the Nasdaq composite crested to a record high that psychology changed. Capping a week of dramatic losses, the Dow industrials plunged a record 618 points, triggering circuit breakers at the New York Stock Exchange, and the Nasdaq slid a record 355 points.

The sell-off was triggered by rising inflation fears and signs that many fledgling Internet companies were burning through their remaining cash and had only months left to live. Brokerages initiated a wave of margin calls, forcing leveraged investors to either put up more money or sell some of their stock to cover their losses.

That April sell-off turned out to be a sign of more to come. The markets tried to rally, but never quite could. Investors stopped buying on those ever-increasing dips, and soon the Nasdaq composite tilted well below the 4,000 mark. From mid-July to Mid-November, the index slid more than 1,000 points to below 3,000.

The perfect storm?

While the downturn seemed to hit fast and furiously, it had been building all along, said Jason Trennert, managing director and economist at the International Strategy and Investment Group, a New York brokerage firm focused on economic research. He said the economy created a "Perfect Storm"-like scenario, in which lower stock prices, rising energy costs, higher interest rates and the technology sector downturn all struck at once.

Click here for 2001 investment tips

Like many economists, he thinks the economy is cooling off rather than falling into recession. But Trennert said this year demonstrates that investors must reduce their expectations. Even if the Fed steps in next month and cuts rates, as widely expected, it will take months to take effect, he said.

"Even if the Fed starts easing next week, there certainly are lags in when the Fed acts and when it starts to have an impact on the economy," he said.

Looking ahead to 2001, analysts say they anticipate a year in which stocks make a healthy comeback. Carty, of New Millennium Advisors, said he expects a spurt of buying in the early part of the year as investors plug money into IRA accounts and mutual fund managers unload some of their cash reserves.

But experts say they don't expect a return to the heady gains of the late 1990s.

"This year is really going to be seen as a transition year away from the booming economy to a more moderate pace of growth," Cochrane said. graphic

  RELATED STORIES

Special Report: The Year in Review

Special Report: Dot.com Shakeout

Special Report: Eyes on the Fed

Main Street reins it in - Dec. 19, 2000

  RELATED SITES

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CNNfn.com: Market news

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.