Wed, Jan 02, 2002 page18

• Wall Street leaves dismal year behind

  MARKET HISTORY Not since 1973 and 1974 have the US markets posted two consecutive years of losses. Analysts say the New Year promises to be a better one

  • AP
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  The year 2001 was one of great contrasts for Wall Street. Stocks alternately plunged on waves of heavy selling and surged higher, showing the resiliency that has attracted millions of investors over the past decade.

  Dismal corporate earnings, a recession and the Sept. 11 terrorist attacks sent the market to its lowest level in nearly three years. But by December, a turnaround was under way, although the major indexes closed down for a second year in a row.

  "We're ending the year on a more upbeat note. That's important because it sets the stage for a good year in 2002," said Hugh Johnson, chief investment officer at First Albany Corp. "But if you look back on 2001, it will be remembered as not just negative, but a truly dismal year."

  

  Traders work on the floor of the New York Stock Exchange. For the year, the Dow fell more than 7 percent, falling to 10,021.50 after dropping 6 percent in 2000.

  PHOTO: REUTERS

  Indeed, few expected a rebound so quickly and strongly from the precipitous selloff that followed the Sept. 11 terror attacks. Stocks, already beaten down by a litany of worse-than-expected earnings, had fallen to some of their lowest levels in more than three years.

  Bargains lure investors back

  Still, investors came back, lured by bargain prices and faith that US markets, despite their troubles, were still the world's best equity investment.

  "I just think that this is the time to take advantage of a market where there's potential for nothing but growth if you believe in our nation," said Susan Ison, a Memphis investor. Her portfolio suffered more last year than during 2000, but it didn't stop her from buying airline stocks on hopes for the future.

  That attitude accounted for much of the trading on Wall Street. Despite a year where setbacks far outnumbered victories and prospects for improvement were murky, the markets never stayed too far down for too long.

  For the year, the Dow fell more than 7 percent, or 765.35 points, to 10,021.50.

  The NASDAQ composite index slid 21 percent, or 520.12 points, to 1,950.40. The Standard & Poor's 500 index tumbled 13 percent, or 172.20 points, ending the year at 1,148.08.

  That followed big losses in the three indexes during 2000: The Dow fell 6 percent, while the NASDAQ lost 39 percent and the S&P 500 fell 10 percent. Not since 1973-74 have all three indexes suffered two down years in a row.

  Early optimism proves fatal

  Investors flocked to Wall Street in January and February, believing they were getting in early on the next bull market. After the dotcom and high-tech meltdown of 2000, few envisioned earnings or the economy would deteriorate much more. The Federal Reserve also made its first of 11 interest rate reductions, leading many to predict a soft landing -- where profit losses and layoffs would be confined to technology and manufacturing and be short-lived.

  In March, though, non-technology companies including Procter & Gamble began warning of weak profits. By the middle of the spring, stocks were officially in bear market territory, the term used to describe a drop of 20 percent or more from the market's peak.

  Once again, though, the markets came back. Stocks rallied and the Dow Jones industrials crested past 11,000. In early August, Goldman Sachs chief investment strategist Abby Joseph Cohen predicted the Dow would end the year at 12,500 and the Standard & Poor's 500 index would reach 1,550.

  The enthusiasm proved unsustainable. More warnings, particularly in the tech sector, deflated the market by Labor Day. When hijacked planes leveled the World Trade Center and destroyed part of the Pentagon on Sept. 11, already jittery investors panicked.

  The three major indexes fell to levels not seen in three years. The Dow's drop was perhaps the most dramatic -- it went from 9,605.51 before the attacks to 8,235.81 by the end of the week following the resumption of trading.

  Nonetheless, a powerful rebound set in almost immediately and by November, indexes were trading at pre-attack levels. Official confirmation that the economy had been in a recession since March failed to upset what had turned into a rally. Wall Street focused on a handful of mildly encouraging forecasts from tech bellwethers Cisco, Oracle and Intel.

  `Amazing' comeback

  "I was just amazed that the market bounced back so quickly after Sept. 11. Personally, I'm going to try to buy as much as I can in next two to three months," said Steve Valiquette, sales and marketing executive for a software development firm.

  At its peak, the Dow rose more than 20 percent, while the NASDAQ composite index's rebounded exceeded 40 percent. But many analysts cautioned against talk of a new bull market. They noted the indexes were still below their summer levels and the outlook for corporate profits was mixed, with companies like Ciena and Merck warnings of disappointments in the new year.

  "It looks like people may be too bullish about the turn in the economy," said Richard Bernstein, chief investment strategist at Merrill Lynch, who believes stock prices in some sectors, particularly technology, have gone up too much.

  "The safehaven companies have become cheap and the risky companies are expensive," he said. "Everyone's paying Bentley prices for Volkswagens, and Volkswagen prices for Bentleys."

  Estimates for the market's performance for this year reflected the mixed views. Johnson, the First Albany commentator, predicted the Dow would reach 10,200 and the NASDAQ 2,100. Tom Galvin, chief investment officer at Credit Suisse First Boston forecast the Dow would reach 11,400 and the NASDAQ 2,350.
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