On paper, at least, we're calm

By Steven Syre and Charles Stein, Globe Staff , 12/1/2000

e don't know about you, but we get depressed when one of our investments loses $1,000 in value.

So imagine how the investing public feels now that its collective investment in the stock market has shrunk by $3 trillion. That is how much wealth has disappeared since the market peaked in late March. And that doesn't even count yesterday's sell-off.

Even in today's world of big numbers, $3 trillion is a figure that gets your attention. It is bigger than the federal budget and nearly as big as the national debt.

With losses on that scale, you might expect people to be despondent. Yet there is little evidence that they are. Confidence is down. People are anxious. But so far, there is no sense of anguish or panic.

So the question we posed to a number of economists was: Why don't we feel worse than we do? Their answers fell into two categories: an optimistic case and a pessimistic case.

The optimists take something of an ''easy come, easy go'' attitude. ''The market went up so quickly that people never fully got a chance to adjust to it,'' said Nicholas Perna, an economist based in Connecticut. In other words, the money was always paper wealth, or as Perna calls it, ''tissue-paper wealth.'' Because people never actually had the money, they may not feel too bad now that it is gone.

Consider a real-world example. Storage Networks, a highly regarded Waltham start-up, had its initial public offering in June. The IPO price was $27 per share. Within a few weeks, the price soared to $142. Everyone connected with the company was dramatically wealthier on paper.

But there was a catch. The insiders were all subject to a lockup provision that prevented them from selling the stock for six months, roughly the end of the year. Yesterday, Storage Networks traded at about $29 per share. Easy come, easy go.

Wayne Ayers, chief economist at FleetBoston Financial Corp., another optimist, argues that the $3 trillion loss has to be put into perspective. According to Ayers, Americans added roughly $2 trillion to their wealth annually through the 1990s, thanks to the rising stock market and rising real estate prices.

This year's market decline has wiped out some of those gains, Ayers said, but people are still far richer than they were a decade ago.

The pessimistic case, not surprisingly, is more depressing.

The pessimists say the reason we don't feel too bad is because the full impact of the market decline has yet to be felt. They compare the market collapse to a storm out in the ocean: When it finally reaches land, watch out.

''We are expecting decidely weaker consumer spending next year,'' said Allen Sinai, chief economist at Decision Economics. Sinai said that a stock-market swoon, like an interest-rate hike, takes time to work its way through the system.

In the short term, Sinai said, consumers will try to maintain their level of spending. But by next year, he predicted, consumers will feel poorer, their confidence will have eroded, and they will not have the benefit of those big capital gains that have fattened wallets in years past.

Consumers may already be getting skittish. Yesterday, two big retailers, AnnTaylor and Abercrombie & Fitch, reported disappointing November sales. The day before, computer maker Gateway said that early holiday sales of personal computer were not living up to expectations.

Mark Zandi, chief economist at Economy.com, said that businesses will react to the stock-market slide with the same kind of pullback. Zandi expects businesses to hire fewer people and invest less money in new equipment.

Again, some of that is already happening. In the third quarter, American businesses increased their spending on equipment and software by 5 percent. That was down from 20 percent in the first half of the year.

It gets worse. Zandi looks for banks to tighten credit and for other lenders, including venture capitalists, to be more cautious about where they put money.

How much of the bad news will be attributable to the market decline? In Zandi's opinion, the answer is a lot.

''The equity market is the key to what has happened and what will happen,'' he said. ''It explains why we have gone from a booming economy to a more middling economy. And if it continues to fall, we will go from a middling to a weak or recessionary economy.''

Somehow we found the ''easy come, easy go'' idea more comforting.

Steven Syre (617-929-2918) and Charles Stein (617-929-2922) can be reached at boscap@globe.com.

http://www.boston.com/business/stories/120100_capital.html

-- Martin Thompson (mthom1927@aol.com), December 02, 2000