NEW YORK (CNNfn) - A miserable year for U.S. stocks culminated with a sell-off Friday, resulting in the worst annual performance for the Nasdaq composite index since its inception in 1971 and the first loss in a decade for the Dow Jones industrial average.|
The decline, coming just one year after all three major indexes posted record gains, shook investor confidence, wiping out about $2.5 trillion in market capitalization.
"It was a year of awakening for the new investor on Wall Street and it was a very quick and sudden reversal of fortunes for many," said Ned Riley, chief investment strategist with State Street Global Advisors. "We ran the emotional gamut from total irrational thinking and perception to reality and capitulation. Last year's market did reinforce the notion that abuses and excesses are eventually corrected and eventually reach a level of overreaction -- and that's how the year ended."
And the excesses to the downside were severe. The Nasdaq suffered most of its biggest annual decline in its 30-year history between March 10 and Dec. 20, when the index bottomed at 2,332.78.
The Nasdaq on Friday ended down 87.24 points, or 3.4 percent, to 2,470.52 -- less than half of its March 10 peak and 39.3 percent lower than it started the year. That tops -- or bottoms, depending on your point of view -- the index's 35.1 percent decline in 1974, and is its first annual loss since dropping 3.2 percent in 1991.
The performance was a far cry from last year, when the Nasdaq recorded an 86.5 percent gain -- and even from the beginning of this year, when it soared to a record high close of 5,048.62.
The Dow fell 81.91 points to 10,786.85, losing 6.2 percent from the start of the year and down 8 percent from its record high of 11,722.98 on Jan. 14. The blue chip indicator's loss is its first since 1990, when it fell 4.3 percent, and its worst since 1981, when it tumbled 9.2 percent.
The S&P 500 shed 13.94 to 1,320.28, falling 10.1 percent from the start of the year. It was the index's first annual loss since declining 1.5 percent in 1994 and its worst performance since 1977, when it dropped 11.5 percent.
Market breadth was mixed Friday. On the New York Stock Exchange, decliners topped advancers 1,473 to 1,490 as more than 1.02 billion shares changed hands. Winners outpaced losers on the Nasdaq by 2,104 to 2,041 as more than 2.45 billion shares were traded.
In other markets, Treasury securities were mixed. The dollar weakened versus the euro but gained on the yen.
The year's dismal decline
TRACKING A DECADE OF PERFORMANCE
Click below to see how the major indexes fared over the past 10 years
Charting the Indexes
Technology stocks continued to cast a dark cloud on the markets Friday , much as they have since the spring. Cisco Systems (CSCO: Research, Estimates) fell $1.31 to $38.25 while Dell Computer (DELL: Research, Estimates) shed 50 cents to $17.44.
There was general weakness in the chip sector as well. Intel (INTC: Research, Estimates) lost 88 cents to $30.06 and Altera (ALTR: Research, Estimates) shed $2.94 to $26.31.
"There's a little bit of profit taking," said Seth Martin, equities analyst with IDEAglobal.com. "They're pretty mixed and it's more of an indivdual play."
Tax loss selling was also putting some psychological pressure on some of the tech leaders.
Microsoft (MSFT: Research, Estimates) shed $1.19 to $43.38 and Oracle (ORCL: Research, Estimates) fell $2 to $29.06.
One of the year's biggest deals, nearing completion, was back in the news as the year wound down. America Online (AOL: Research, Estimates) slid 45 cents to $34.80 after rivals of the online service provider were reported to be lobbying Federal Communications Commission officials regarding the pending acquisition of CNNfn parent Time Warner (TWX: Research, Estimates), with particular concern focused on AOL's Instant Messenger online chat function.
The Dow was under pressure from J.P. Morgan (JPM: Research, Estimates), which fell $7.50 to $165.50
With little in the way of fresh news or a catalyst to prod the market in any direction, the sell-off cast a pall on the market. But analysts said the action was relatively muted in the year's final trading session.
"There's a little bit more weakness in the Nasdaq and in the tech sector than we expected -- it may just be that the sheer number of buyers aren't there," said Martin. "But the retailers are up and there's a little positive action in the manufacturers, which could be a defensive play on the part of investors."
Retail and manufacturer stocks moved higher. Home Depot (HD: Research, Estimates) gained $2.06 to $45.69, Wal-Mart Stores (WMT: Research, Estimates) rose 19 cents to $53.13, and Boeing (BA: Research, Estimates) edged up 56 cents to $66.
What goes up must come down
When the year began, sociologists wondered if America had become a nation of stock traders. E*Trade (EGRP: Research, Estimates) and Ameritrade (AMTD: Research, Estimates) bought television ads alongside Coca-Cola (KO: Research, Estimates) and Anheuser-Busch (BUD: Research, Estimates). Cocktail party chatter revolved around stock portfolios. The New York Daily News wrote about a cab driver who traded stocks from his dashboard.
Click here for more on the Year in Review Special Report
For stock investors, making money seemed easy.
"We became very complacent that technology was going to go up for ever," said John Hughes, stock strategist at Shields & Co.
A lot changed. Now, the term "day trading" has nearly vanished from the vernacular. And most investors would rather not talk about their portfolios.
But analysts say that investors should not run away from the stock market – value and profits can still be found.
"I think people need not to rush to write off the stock market," said Charles Payne, head analyst at Wall Street Strategies. "I think one of the lessons to remember was (for example) one of the hottest stocks in the market was Qualcomm (QCOM: Research, Estimates)."
Shares of Qualcomm, which rose 2,622 percent in 1999, fell $7.19 to $82.19 Friday. "Fortunes can change and can reverse themselves and I think there is a lot of quality out there both in and out of tech," said Payne. "I hope investors aren't so cynical that they don't want to participate."
Who's to blame?
What went wrong? Analysts have several answers. Chief among them: higher interest rates. The Federal Reserve raised rates six times between June 1999 and May 2000, pushing the central bank's target rate for loans between banks to its highest levels in a decade.
But the Fed's effort to keep a record economic expansion from generating crippling inflation also slowed the economy's growth rate in half.
As consumer spending cooled and borrowing costs rose, such technology powerhouses of the market surge as Intel (INTC: Research, Estimates), Apple Computer (AAPL: Research, Estimates) and Microsoft (MSFT: Research, Estimates) warned that financial disappointments lied ahead. Huge sell-offs followed.
Ronald Hill, partner and equity strategist at Brown Brothers Harriman, talked with CNNfn Before Hours host Sasha Salama about his positive outlook for 2001.|
Technology investors, who thought their shares were immune to tighter credit, learned to believe otherwise.
And Larry Wachtel, market analyst for Prudential Securities, expressed concern that the corporate results warnings plaguing the markets at year-end may continue to cause problems once the new year starts. (395K WAV) (395K AIFF)
Analysts agree that 2001 will likely be off to a rocky start but the fact remains that earnings do matter.
"I think the year starts out very similar to how it's ending," said Barry Hyman, chief market strategist with Weatherly Securities. "Just because a stock is cheap doesn't mean it should be bought – you have to look at the growth rate and I think the Fed lowering interest rates is going to be very important."
But interest rates were just part of the story. The price of oil surged this year, climbing above $37 a barrel in September, increasing energy costs for business and consumers.
And one month later, the euro -- the European single currency introduced in 1999 -- fell to a record low below 83 cents. For multinational companies, the decline sapped profits converted into dollars from euros.
Along the way, some of the nation's most dependable companies imploded. AT&T (T: Research, Estimates), the year's worst performer in the Dow Jones industrial average, fell 66.5 percent as of Wednesday's close. Microsoft (MSFT: Research, Estimates), No. 2 among Dow decliners, lost 60 percent.
Popping the Internet bubble
Internet stocks took the worst beating, with the Dow Jones Internet index shedding 65 percent of its value. Consider Pets.com, whose sock puppet "spokesman" was popular enough to be sold in toy stores. Eleven months ago, the online retailer spent millions on Super Bowl ads.
In November, its revenue paltry, its stock price decimated, Pets.com folded.
Like the California Gold Rush of the 1840s or the Dutch Tulip Bulb Craze of the 1600s, the Internet mania showed all the signs of a market bubble. It popped.
"These kind of bubbles are something that everyone participates in," said John Bogle, former chairman of the Vanguard Group. "That's why they are bubbles."
Frenzy played a role. Driven by the most optimistic expectations for growth, investors had bid Internet stocks to levels beyond historic precedent. In late 1999, Amazon.com (AMZN: Research, Estimates), a company not expected to make money anytime soon, rose above $100 a share. The stock lost more than 75 percent of its value in 2000.
Jeff Davis, chief investment strategist at State Street Global Advisors, believes the Internet enthusiasm wasn't unwarranted -- just overdone. (360K WAV) (360K AIFF)
Most of the market also suffered. The Dow Jones industrial average posted it first loss since 1990. The S&P 500, a broader index, saw its worst year since 1981, when the index fell 9.7 percent.
This was also a year when staid investments became sexy -- and sexy turned staid. Sysco (SYY: Research, Estimates), the food distributor, outperformed Cisco Systems (CSCO: Research, Estimates), a kind of proxy for the growth of the Internet. Bonds did better than stocks.
Utility stocks surged, with the Dow Jones utility index rising to a record in December. And real estate investment trusts and drug stocks soared. Philip Morris (MO: Research, Estimates), the beleaguered tobacco and food company, became the best performing stock in the Dow Jones industrial average, followed by Boeing (BA: Research, Estimates).
In fact, by at least one measure, this wasn't so bad a year -- Standard & Poor's says that, as of Thursday, 278 of the stocks in the S&P 500 were higher this year while 216 fell. It's just that the losses in the losing issues far outweighed the gains in the gaining ones.
Many hard lessons were learned as dot.com after dot.com fell off the speeding treadmill, but experts say that Internet evolution is not dead.
Analysts say investors should keep in mind that Internet technology is not going away, just the companies that have weak business models and lack capital. But the Internet is here to stay and dot.coms do have a role, they said.
"It's [the Internet] not going to replace everything," said Lanny Baker, Internet research analyst with Salomon Smith Barney. "It's going to complement most stuff but there are some things it's going to supplant."
Investors would be best served to take a back seat during the first half of 2001 while the dot.com shakeout continues, and then seek those stalwarts that prove their survival skills.
"I would sit on the sidelines for six months and let the angel of death gather up the corpses," said Daniel Peris, senior analyst with Argus Research. "The dot.coms that are worth investing in will be around in six months."
Ann Lee, portfolio manager at Symphony Asset Management who bucked the markets with a 40 percent gain, said solid technology stocks may emerge as big winners again in 2001. (418K WAV) (418K AIFF)
Diversify, diversify, diversify
One lesson looms: the importance of owning a diverse portfolio of securities.
As the year began, Warren Buffett, the famed value investor, seemed to be missing the opportunities of the so-called "new economy." But as he often does, the Sage of Omaha came out ahead by year's end.
Buffett's Berkshire Hathaway, heavy on insurance and manufacturing companies, returned more than 15 percent this year.
Looking ahead, some analysts see the market reversing course by rising in 2001. The Federal Reserve is expected to cut interest rates next year. Corporate profits are forecast to grow in the high, single digits. And stocks, according to many models, are undervalued.
Mark Keller, market analyst at A.G. Edwards, said the Fed will cut rates at its meeting in January, and that stocks will respond favorably to the action. (281K WAV) (281K AIFF)
"Just as things get overdone on the upside, they can get overdone on the downside," Shields & Co.'s Hughes said.
Linda Jay, NYSE floor trader for RPM Securities, said the year ended with optimism in the investment community. (234K WAV) (234K AIFF)
Others note that many technology stocks, though down, are still expensive. Vangaurd's Bogle, for one, sees more losses ahead.
But market historians take heart. In 1974, when the Nasdaq last suffered its worst year on record, the index went on to record a 29.8 percent gain in 1975.
For investors bruised by 2000's losses, a 29.8 percent gain would be wonderful.
-- Additional reporting by staff writer Jake Ulick