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The bull changed how we spend

The once-sizzling stock market encouraged more risks and less saving while redefining work and home life.

The bull market, born in 1982 amid recession and concern that the U.S. economy was terminally ill, is being measured for its coffin.

A requiem might be premature for an animal that arose stronger than ever after reports of its death in the 1987 crash. But whatever its immediate prospects after the worst week for the Dow since 1989, this bull will long be remembered for the changes it has made in America.

It changed the way people lived and the risks they were willing to take. It led to Americans becoming more dependent on stock market profits than ever before _ and gave them confidence that little needed to be saved.

The 1990s economic boom spurred the bull market, and was in turn increased by the spending that the bull market encouraged. Stock options became widespread, making millionaires of even low-level employees in companies that became stock market favorites.

The stock market, once viewed by many as a highly risky place where amateurs were likely to suffer if they were not nimble, came to be viewed as a sure thing, at least in the long term.

"Individual investors got hooked on equities," said Robert Glauber, the chief executive of the National Association of Securities Brokers and a Treasury Department undersecretary in the first Bush administration. "It went too far, and they came to think that equities were riskless."

In 1999, as the bull market reached its zenith, the net worth of American households rose 14.1 percent. "It influenced the size of the homes we live in, the type of cars we drive, how we go on vacation," said Douglas R. Cliggott, a strategist at J.P. Morgan Chase. "Because of the extraordinary improvement in the average American's net worth, it made us feel comfortable carrying what by historic standards would have been an extraordinary amount of debt."

The stock market's fall has put a dent in Americans' wealth. Household net worth fell 2 percent in 2000, the first such fall since the government began keeping track of the statistic after World War II. Households had experienced a small increase even in 1974, during the worst recession since the 1930s.

The loss of wealth reflects that by 1999 Americans had 60 percent of their investments and savings in the stock market, double the proportion they had in 1982, according to J.P. Morgan Chase. And that understates the real figure, since retirement funds like 401(k)s are excluded. Never before in American history has the wealth of so many been tied to Wall Street's fortunes.

"I'm old enough to remember when you went into a bar during the summer, they were watching a baseball game," said Byron Wien, the chief U.S. equity strategist for Morgan Stanley Dean Witter. "Now, they're watching CNBC."

The bull is, at best, wounded. In the final years of the great rise _ one that saw the Dow Jones Industrial Average climb 1,409 percent from the 1982 low to the early 2000 high, while the Nasdaq composite index soared 3,072 percent _ the biggest winners were the technology stocks. Some of the highest fliers in the boom are dead, and even the best are down 50 percent or more from their highs.

The Nasdaq composite, dominated by technology stocks, is down 63 percent from its peak of last March while the Dow, which had held up much better because of its old-economy concentration, is off 16 percent from its peak, after losing almost 8 percent last week. The Standard & Poor's 500, a widely followed index of large companies, is down 25 percent from its high.

If the bull is dead or dying, it will leave a society that has depended on it far more than anyone could have anticipated even a decade ago. Corporate America went deeply into debt to buy back stock and get shares to issue to employees, confident that share prices would keep rising.

Family finances were reshaped. Far fewer companies offer traditional defined-benefit pension plans that promise guaranteed incomes to retirees. Instead they offer defined-contribution benefit plans like 401(k)s, where the investment risk belongs to the beneficiary. When times were good, with stock prices rising and inflation quiet, people felt comfortable saving little money outside of their 401(k)s.

Now, if the perception spreads that the days of easy money are over, that could persuade Americans to save more to finance their retirements. Savers would benefit in the long run, but the adjustment would further depress economic activity in the short run, damaging business profits and perhaps hurting stock prices more.

Such a situation was foreseen by no one in the summer of 1982. The Dow was trading at less than 800, and bearishness was rampant. Inflation and interest rates were high, the U.S. economy was in recession and pessimism was widespread regarding the ability of American business to compete with foreign companies, particularly those of Japan.

The stock market was lower than it had been in 1966. To make matters worse, the accountants were cracking down by changing rules that had made it possible for companies to ignore how underfunded their pension plans were. To comply with the accounting requirements, companies would have to find ways to make large contributions to their pension plans.

Or, they could find ways to reduce their obligations. In that atmosphere, the trend toward defined-contribution plans took off. Workers were forced to decide how to invest their retirement money. While much of that early investment went into bonds and money market funds that were paying high rates of interest, as time went on and rates declined, more and more savers were forced to consider putting some money into stocks.

Those who took the plunge did well. American business was embarking on a golden age as its efforts to become more competitive bore fruit. Corporate profits, at 7.5 percent of national income in 1981, grew to 12.5 percent by 1997.

In 1987, it appeared to end with a crash. The Dow fell 22.7 percent in one day, and the bull's obituaries were written.

But the bull was not dead. By late 1989 the stock market was back to its old highs. The lesson learned was not that stocks are risky; it was that money is to be made by buying when prices fall.

Stock options were relatively rare in 1982, but as the bull grew they became far more common. And at many companies, particularly technology companies, they were offered not just to senior executives but to many others, all the way down to the lowest levels. In the Seattle area, where Microsoft is based, so many became wealthy that the local housing market was distorted, which might have helped lead to strikes in recent years at Boeing and the Seattle Times, where such wealth had not flowed even though living costs were on the rise.

For the companies that issued such options, the benefits included loyal employees _ the options would be canceled if the worker quit _ and inflated profits, since accounting rules did not require that the value of the options be treated as an expense. The companies even got a tax break when the options were exercised to buy stock.

But as more options were exercised to buy shares, companies worried that shareholders would be offended that their stake was falling _ dilution is the Wall Street word _ because of the shares being issued. So companies bought back more and more of their shares to avoid such dilution. For many companies, those purchases used up most of their available money, so they had to borrow for investments in their businesses. During a period of unparalleled corporate prosperity, the debt of Corporate America grew substantially.

At the peak of the bull's vigor, Internet stocks went wild. It did not matter that many had no profits and little hope for any. There were voices of caution, but they were soon discredited as the share prices kept rising.

"I used to get that look that people reserve for benign idiots and small children when I would say that would have to become the retail sales industry for the United States to grow into the market capitalization it had at its peak," recalled Robert Barbera, the chief economist of Hoenig & Co. Amazon is down 90 percent.

As the new-offerings market grew to a fever pitch, the goals of those starting businesses seemed to change. Where once the dream was to start a business and watch it grow and become profitable, more and more seemed to see the initial public offering as the end point, when the money would have been made.

Now the illness of the bull, and speculation that it has died, has put pressure on Americans to decide whether stocks are the best long-term investment and that buying on dips is a good strategy. So far, Americans seem to be putting much less money into stocks but avoiding selling if they can. With Treasury bonds paying less than 5 percent interest, the investment alternatives are not especially attractive.

Glauber, the NASB chief executive, expresses confidence that the aversion to stocks will not return. "I think they will still conclude that equities are an important part of their long-term portfolio," he said.

On Wall Street, most strategists think the stock market is at or near a bottom. Abby Joseph Cohen, the Goldman, Sachs strategist, recommended earlier this month that investors put more money in stocks, which she viewed as undervalued even before last week's plunge. She set a target of 13,000 for the Dow by the end of this year.

That might prove accurate, but forecasts are inevitably colored by recent history. Now, that history shows years of strong gains.

Many years ago, in a very different environment, the New York Times reported that James L. Freeman, director of research at First Boston, was reflecting the prevailing Wall Street opinion when he forecast that "the market's going to take the ultimate dive" before prices were likely to turn up. "Batten down the hatches," he advised.

That article, headlined "Dark Days on Wall Street," was printed on Sunday, Aug. 15, 1982. No one knew it, but a great bull had been born the preceding Friday.