The American stock market has been surging in recent years, with the help of stocks in technology companies. But recent trading in technology stocks has been volatile. RFE/RL's Andrew F. Tully looks at the recent market activity, and the economy behind it.
Washington, 5 April 2000 (RFE/RL) -- The recent performance of the American stock market raises interesting questions about the nature of the economy it is supposed to represent.
Two months ago, the U.S. economy completed its ninth year of uninterrupted growth -- the longest economic expansion in the nation's history. During the same period, it witnessed the birth of an entirely new kind of industry: technology, with a focus on computers.
This new industry generated thousands of millionaires -- both among the officers of the companies and those who invested in them.
But for the past few weeks, the value of technology stocks has been declining. And on Tuesday, the Nasdaq, the stock exchange that trades most technology stocks, fell sharply early in the day, and dragged non-technology exchanges down with it.
Three hours into Tuesday's trading, the Nasdaq had lost 574 points -- more than 13 percent of its value of 4,223.68 points at the close of trading on Monday. At the same time, the Dow Jones Industrial Average was down more than 504 points, almost 4.5 percent of its value of 11,221.93 at Monday's close.
But by the close of trading yesterday, both exchanges had rebounded. The Nasdaq had lost just over 74 points for the day and the Dow had lost about 46 points.
Just what is going on here? First, it's important to look at the exchanges themselves.
Nasdaq began trading in 1971, an upstart compared with the well-established New York Stock Exchange, or NYSE. The NYSE tended to snub newer companies without financial pedigrees, so their shares were traded on the Nasdaq.
The most prominent "new companies" were involved in technology. As a result, the Nasdaq is often called "tech-heavy" -- dealing in the "new economy." The NYSE, meanwhile, continued to prosper by handling trades of stock in the more established companies -- known lately as the "old economy." Trends in the NYSE are reflected in the Dow Jones Industrial Average. The Dow is an average of 50 stocks that are widely seen as representative of the entire market.
Often the "old" and "new" economies were seen as somehow contrary to each other. When the Nasdaq exchange was up, the Dow was down -- and vice-versa. Recently, when the Nasdaq had a particularly steep one-day decline, many analysts said investors were giving up on the "new economy" and embracing the "old economy."
But Tuesday's volatility affected the NYSE and the Nasdaq the same way. It appeared that the Nasdaq's continuing weakness began to have a similar effect on the NYSE.
It may be significant, or it may be coincidental, but Tuesday's market wildness followed by one day a judge's ruling that Microsoft Corporation is guilty of violating U.S. anti-monopoly laws. The law forbids a company from taking action that would keep competitors -- or potential competitors -- from doing business.
The Nasdaq lost more than 348 Monday in anticipation of the judge's ruling. But it is unclear whether Microsoft alone was responsible for the decline.
First, Microsoft is traded on the NYSE. But it is a leading technology company. Therefore similar companies, which dominate the Nasdaq, follow its lead.
Second, the Nasdaq has been declining for the past few weeks. Even before the Microsoft ruling, analysts have been attributing the drop to overvalued stocks -- particularly the so-called "dot-com" stocks. In other words, the market was undergoing a "correction" in the stock valuation.
Amazon.com probably best exemplifies the nature of the "dot-coms" -- and their problems. In a word, the value of these companies is raw potential,
Amazon began less than five years ago as a brilliantly conceived way to buy -- and sell -- books on the Internet. From the company's inception, finding and ordering a book Amazon's World Wide Web site was easy. Shipping was quick.
Amazon's sales were outstanding, and its young founder, Jeff Bezos, quickly became a kind of folk hero among entrepreneurs. Bezos decided that everyone -- not just entrepreneurs -- should know about his company, and he advertised heavily.
Meanwhile, he decided to expand his business by making music CDs as convenient to buy on-line as books were. From there, Amazon continued to grow. Now it sells electronics, software, toys, video games and tools -- besides books and music CDs. It even conducts auctions to compete with eBay, the first on-line auction service.
But because of Amazon's extensive advertising and expansion, the company has yet to show a profit. But it still has potential.
If the market has been overvalued, will the economy slow down? Too much growth can cause inflation, as employers compete for workers and consumers compete for commodities. Unchecked inflation can cripple an economy by making goods and services unaffordably expensive eventually.
So in recent months, the U.S. central bank -- the Federal Reserve Board, also known as the Fed -- has been raising the nation's interest rates to make borrowing more expensive. As a result, businesses are less likely to seek loans for expansion. Growth slows, and inflation is kept at bay -- at least according to the Fed's chairman, Alan Greenspan.
But higher interest rates also cause declines in purchases of expensive items like homes and cars. This affects the wealth of manufacturers, and the people who sell them. So increases in interest are not always attractive.
The members of the Federal Reserve Board will meet next on May 16 to decide on interest rates. Will they forego another interest rate because of the current volatility in the stock market?
Arthur Hogan is a stock analyst with the Jeffries Group, stock brokerage. He says the Fed will ignore the stock market when it makes its decision.
"I think the Fed's got their own agenda. I think they're pretty -- I think they act pretty independently of Wall Street. And regardless of what we think, I think the Fed's going to do what they're going to do in May."
A less pessimistic view is expressed by Bruce Steinberg, the chief economist at Merrill Lynch, a leading brokerage.
"The key thing that he is wanting to do is to simply slow down the economy. If this Nasdaq correction helps to slow down the economy, then it's something that Greenspan will like and it may slow him -- slow down the rate hikes to come."
But Steinberg points out that the American economy is still growing regardless of swings in the stock market, and that may prompt Greenspan to raise interest rates again.