What A Drag!

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Several economists see the current market as an untraditional bear market or, as Harvinder Kalirai, an economist at the consulting group I.D.E.A., sees it, what's happening on Wall Street is "a cyclical bear in a secular bull market. This is a cyclical fluctuation." The longer-term or secular trend in the market, though, "is still higher."

Many individual investors also hold that faith. Dennis Lese, 52, an executive with Amoco Corp. in Chicago, says that he is staying in the market but that the six-figure losses he suffered last week have caused him to postpone his planned early retirement. "I was thinking about retiring and living off stocks," he says. "But now I think I'll work a few more years."

Others seemed content to ride it out, in the knowledge that the gains of the past few years will cushion the impact of a down market now. "Anyone with brains knows the thing to do is to sit back and wait," says Stephanie Rubin, 52, an executive with a search firm in Chicago who has about $300,000 in stocks. "If it's down 25% on paper, it doesn't bother me because it's money tied up in an IRA account. I'm not going to touch this money till I'm 65."

Some people who were actively playing the market, however, were singing a different tune. "I was panicking," said Alan Herkowitz, 39, a New York systems analyst and a self-described "short-term trader" who invests "play money" in the market.

One of the biggest worries in a sustained market downturn is that it might depress consumer confidence and spending. Contrary to popular belief, though, big stock market drops alone rarely herald recessions. According to a study by Peter Temin, an economics professor at M.I.T., falling stock prices directly caused only one minor economic downturn in this century, in 1903.

But a slumping stock market can certainly add to the drag on a slowing economy, through the so-called wealth effect. In a rising market, economists estimate that for every dollar of increased wealth, consumers spend an additional 4[cents]. And they often stop spending that money when their stock gains erode. If $2 trillion has been lost from investors' pockets over the past seven weeks, then at 4[cents] on the dollar we could expect an $80 billion drop in annual consumer spending, or about 1% of the total U.S. economy. While that alone is not enough to stop the economy from growing, economists say, it could combine with the global currency crisis to tip the U.S. into recession later this year or in early 1999.

A persistent stock market decline can also hurt the economy by making companies more cautious about expansion and hiring. "If the stock price isn't doing well," says John Lonski, chief economist for Moody's Investors Service, "shareholders will put pressure on management to cut costs to improve returns." That usually means layoffs and plant closings, which "ripple through the economy" as laid-off people cut spending.