When It Comes to the Markets, Nothing -- Good or Bad -- Lasts Forever

By Allan Sloan
Tuesday, April 21, 2009

Numbers can talk. And one of the key indicators of this year's Fortune 500 -- the companies' stock market value -- is absolutely shouting. It's telling us that nothing is forever, and that people, businesses and governments can no longer depend on rising financial markets to bail them out.

The talking number is $4.1 trillion -- the amount by which the market value of publicly traded companies in this year's Fortune 500 fell compared with 2008's list. The decline, 37 percent, is by far the biggest in both dollars and percentage since Fortune started tracking the market values of America's biggest companies 22 years ago. The two-year decrease -- $5.3 trillion and 43 percent -- is a record as well.

Since the Fortune 500 hit its peak valuation in spring 2007 -- our stock market years end in late March -- the global boom has been replaced by global doom, as economies throughout the world have gone south. And get this: The 500's valuation is down 13 percent from 11 years ago. Thus, big-company U.S. stocks have been dead money for more than a decade. Had they risen at their historical rate after 1998, they'd be worth more than twice as much as they are now. So much for the myth that stocks as a group are a fundamentally reliable investment over the long term.

Another shattered myth is that the financial markets would provide for average people while solving seemingly intractable problems such as government budget deficits and chronically underfunded pension plans.

The idea of the market as cure-all arose during the great bull market that ran from August 1982 through March 2000. With stocks (as measured by the Standard & Poor's 500-stock index) returning an average of 20 percent a year in capital gains and dividends, middle-class people could fund their own retirements with minimal effort and even afford private college for their kids if they started saving early. Market gains would transform state, local and corporate pension funds from underfunded to overfunded, and capital gains -- and stock option -- related tax revenue would balance budgets on the federal, state and local levels. No pain, all gain.

The topper came four years ago: President George W. Bush could even propose privatizing Social Security by letting beneficiaries invest in stocks and have the idea taken seriously. Now the cycle has shifted. For many older baby boomers who once felt comfortable but have seen their 401(k)s and other accounts eviscerated the past two years, the magic words are no longer "stock market" -- they're "Social Security." That program, which is going to need to cut growth in benefits or get a huge bailout in a few years, is assuming a more important role in retirement planning than it has in decades.

In addition to "the market will provide," another myth seems to have mercifully vanished for now: the CEO as wealth-creating warrior-king. That was a dominant theme in business journalism for years. The implication was that if a CEO's brilliant strategy "added" tens of billions of dollars to a company's stock market value, he (or the occasional she) deserved tens of millions -- or hundreds of millions -- in compensation.

Today it's clear that many of the now-vanished gains in company valuations had more to do with fashion than with the chief executive. Excessive CEO pay and perks that became routine during the market's good years are now under attack, as well they should be.

But one of the beauties of capitalism is that it's resilient. Just as good times don't last forever, neither do bad times. Someday -- possibly for the 2010 Fortune 500 -- the stock market will be on a roll again. Economies, which currently seem to be heading south at flank speed, will stabilize and maybe start to grow. One of the most dramatic changes brought on by our two-year-old financial meltdown -- power shifting from private markets to governments -- will begin to reverse itself.

Nevertheless, this market debacle will be a searing reminder for at least a generation that good times don't last forever. And that the stock market doesn't give anyone a free lunch.

Allan Sloan is Fortune magazine's senior editor at large. His e-mail address is asloan@fortunemail.com.

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