Economy 101: Wall Street not whole picture; look to Main Street

Posted: Thursday, March 29, 2001

Call it the Yo-Yo Market, with apologies to the great cellist. Stocks were up, way up ... then they were down, way down. Up again, down again. Just what is going on here, and what does it say about the state of the economy?

Probably the first thing to keep in mind is, the stock markets are not the economy. They are a measure of how investors think certain components of the economy will perform in the future, but they are not the economy. Nor are they necessarily an accurate summary of economic performance at any given moment. This is something we have tended to forget over the past few years.

Of course, this is hardly a comforting distinction for those who increased their spending based on paper gains from investments when the market was up. And that, put simply, might be the biggest problem currently faced by the economy and the stock markets alike.

During the boom years of the mid-to-late '90s, more Americans invested in stocks than ever before. Most became shareholders through their retirement accounts.

But in an era when online brokerages tantalized would-be customers with visions of truck drivers owning their own islands, plenty of Americans also sank a lot of short-term savings into stocks. And those who got into the market -- especially into Internet stocks, when Amazon and Yahoo were trading in triple figures ... well, they've lost a lot of money. As for those who were hoping to retire soon, in comfort, many are now looking at more years of work, with an increased need to save whatever they can.

Back in the "real" economy of goods and services, of manufacturing, distribution and selling, less disposable household income means fewer sales. Inventory piles up. Layoffs become necessary. And corporate profits fall, which perpetuates the vicious cycle that is the dark twin of the virtuous cycle we saw previously in the markets.

When stocks plunged on the same day that the Federal Reserve made its most recent half-point rate cut, some feared the worst, that the bottom would drop out of the markets. These were likely the same people who, little more than a year ago, were saying that stocks would just go up and up. The thing is, the markets are trying to sort out two related but separate dynamics, and that is making them particularly volatile right now.

The first dynamic is the rise and fall of the Internet stock "bubble." A speculative bubble occurs when prices are no longer based on real value but on the belief that there will be more buyers down the line willing to buy at an even higher price. Has the Internet bubble burst? Three words: Pets-dot-com.

The second dynamic, though, is the traditional business cycle of boom-bust. Because non-Internet stocks -- especially technology stocks -- also got lifted along with the bubble, they have dropped along with it. But these are, for the most part, good companies with legitimate products and real profits.

Right now, the question for Wall Street is: What are these companies worth in a less-frenzied market environment? And this question is tied to the larger one, the one on everybody's lips: How is the economy doing?

The answer to that is -- no one can be sure. Indicators are mixed, though generally down. Bottom line, though, is that America's economic infrastructure is still strong. As for stocks, remember, the markets went up while the Fed was raising rates ... and turned out to be wrong. Now that the Fed is cutting rates, to whom are we going to look -- Wall Street or Main Street?

I'll put my bets on Main Street.

Dan Rather works for CBS News.

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