On Wall Street, the nerds got their revenge this year.
The Nasdaq Stock Market, long an underdog to the New York Stock Exchange, suddenly set the tone for the markets--and market capitalism. It was the stock market of the year--and of the new economy.
You can't argue with the numbers. The Nasdaq composite index has surged 81 percent this year, an astonishing 10 times the gain of the NYSE composite index. On Thursday, the Nasdaq index briefly crossed 4000 for the first time--a mere 36 sessions after reaching 3000.
The fuel: techno-savvy do-it-yourselfers who revered Internet companies and reviled bricks-and-mortar brokers. They helped set the pace for Nasdaq's showering of initial public offerings with outrageous price run-ups. And Nasdaq's Internet stocks rose to levels that alarmed the country's economic establishment but entranced the masses.
The trend was summed up when Amazon.com founder Jeff Bezos--the pioneer in a gang of bankers who have high-tailed it to high-tech firms--was named Time magazine's Person of the Year.
Never mind that his and so many Nasdaq-traded companies have no earnings. It's the new economy, stupid.
Only a few short years ago, newborn money-losing techno-firms and faceless, ordinary investors got only an insignificant shrug from the Big Men on Wall Street: the NYSE gatekeepers, the investment bankers at Goldman Sachs and the dealmakers at Morgan Stanley. But this year, a whole new force usurped power.
When the nation's tens of millions of ordinary investors decided that the techno-geek firms were sexy, they channeled their collective and massive savings into these companies and contributed to a sea change in the investing culture of America.
Other investors, from conservative portfolio managers to once-wary foreign investors, have followed.
"Everybody's buying concepts and not earnings," gushed Prudential Securities' celebrated prognosticator, Ralph Acampora. "Nasdaq's got wings. It's the sizzle, and who cares about the steak?"
This is the philosophy that drove the term "day trader" into mainstream English, as people left ordinary jobs and flocked into a proliferation of firms that supply machines linked directly to the market. The burgeoning industry got a surge of notoriety in July, when a chemist named Mark O. Barton walked into a firm where he had lost money day trading and gunned down several former colleagues.
He, like so many hyperactive traders, favored high-tech stocks such as Yahoo and Amazon and a host of smaller names that big money managers consider a gamble.
Some of them paid off big time; others were horrible losers. But the success of the winners has overshadowed a trash heap of small tech start-ups and forgotten old-fashioned firms.
"You'd never know that thousands of companies have been clobbered," said Marshall Acuff, chief market strategist at Salomon Smith Barney Inc.
This divergence also lifted other widely watched market barometers to new highs, though, perversely, their performance paled in comparison with Nasdaq. The Dow Jones industrial average is up 24.2 percent, and the Standard & Poor's 500-stock index is up 18.6 percent.
"Is this a fluke or something?" Acampora asked. "Hell, no. This is a phenomenon. I think we are in the '50s again."
Acampora was referring to the period between 1949 and 1961, when the Dow surged more than 500 percent, mainly because of a narrow group of highflying stocks.
Many prominent market watchers, who are followed like soap-opera stars, expect the market to keep booming, though of course there is a minority predicting an early millennial bust. Television cameras swarmed Acampora's office last week to document his announcement--or prediction, anyway--that the Dow would top 13,000 next year. This boom, he predicted in an earlier interview, will continue for six to eight years, carrying the Dow to the 20,000-to-25,000 range.
The numbers have driven expectations wild--and conservative money managers crazy. Investors expect to get those kinds of returns. So they're out stock-picking on their own and pushing help aside.
"I had two brokers and I don't think they were doing right by me," said a senior citizen who lives in the District. "I don't think they did as well by me as they could have. Ain't nobody going to care about my portfolio more than I do."
She plans to start with $10,000. She calls that her "mad money"--cash that she will throw at very risky stocks. "If I lose it, so be it," she figured. "At least I will have learned."
She is among a slew of investors who have recently gone it alone. Driven by technology--and access to information--there are more than 11 million online brokerage accounts now, according to Greg Smith, an analyst at Hambrecht & Quist, a Silicon Valley investment bank that was purchased this year by Chase Manhattan Bank. The online world's share of all stock trades has grown to 17 percent.
These online investors tend to favor technology stocks. According to the online brokerage firm Ameritrade Inc., the top 10 buys of its customers are technology companies, with America Online Inc. at the top and Cisco Systems Inc. ranked 10th. Ameritrade Holding Corp., the parent company, and competing E-Trade Group are sandwiched in between.
"Is this healthy? Is it sustainable?" Smith asked. "We've had unprecedented gains across the board. That begs the question: Are investors expecting too much out of this market? I think expectations are getting out of whack."
Pointing to the brief sell-off in Internet stocks in August, he cautioned that slumps can happen. "You have to remember, retail investors can be fickle," Smith said. "Trade volume can dry up quickly. Volatility is only going higher."
The online trading firms are trying with all their might to stoke bad feelings toward traditional brokers. New ads feature cops dressing down underperforming fund managers and hordes of small investors breaking down the doors of the New York Stock Exchange.
"The reaction is, 'Doug doesn't get it,' " said Doug Pratt, who manages a $350 million portfolio at Bricoleur Capital Management in San Diego.
"The red-hot Nasdaq has cost us profits and dollars," Pratt said. "Stocks have never done what they're doing now. It's a probability business over every period. We've seen the probability stretched. What people are missing, though, is that the market's not up--the indexes are."
Indeed, under the surface, stocks are not as rosy as they appear. More stocks have declined this year than advanced. Through Dec. 16, on Nasdaq, 65 percent of all stocks were down 30 percent or more. On the NYSE, 57 percent were off 30 percent or more from their highs. In the S&P 500, 49 percent were down 30 percent or more.
"Home Depot, Wal-Mart, Procter & Gamble are driving these averages up and up in a frenzy," said Dick McCabe, chief technical analyst at Merrill Lynch & Co. "Nothing else is participating. People talk about the Nifty 50 of the early '50s. Now, it's a more extreme dichotomy, as in the early '70s." Acuff noted that the top eight stocks in the S&P 500 produced 50 percent of the performance of that barometer's top 50 stocks for the year. "The market is even more narrow," he said, "more divergent than it was last year."
Many of the highflying tech stocks trade on Nasdaq, because they once didn't have the profits and revenue to enter the exclusive halls of the New York Stock Exchange. The establishment, though, recently began acknowledging the importance of new money. To wit: The revered Dow added, for the first time, two Nasdaq stocks to its average--Microsoft and Intel.
"The most changes in the Dow since the 1930s have occurred in just the last three years," noted Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. in Chicago. "It shows a creative destruction of the new era."
"These companies are where the future's at," said Mike Houston, a 20-year-old computer science student at the University of California at San Diego who poured $80,000 of his college trust fund into stocks. He picks many of his own stocks, focusing on Cisco Systems, Amazon and other top-shelf tech companies.
Indeed, the U.S. capital markets, as they head into the new millennium, are completing a transition begun almost 100 years ago, as the country has evolved from a capitalist nation with markets controlled by a handful of powerful capitalists to one where Capitalists R Us.
At the turn of the century, stocks were generally in the hands of the exceptionally wealthy, banks and corporations. As a new century dawns, America is really a nation of shareholders.
Half of all households own stock, directly or indirectly, and billions of individuals' dollars are mainlined into the market each week through 401(k) plans.
"I call it 'dot-communism,' since we've all brainwashed ourselves to believe that the old verities no longer apply," said Marc Beauchamp of the North American Association of Securities Administrators. "Marx trumps Adam Smith, Bezos trumps Buffett . . ."
Perhaps the most visible sign of the shift is right in the heart of Times Square in Manhattan. The air space was once dominated by advertisements by Japanese electronics companies; now Nasdaq has the biggest sign there. In cyberspace, the Nasdaq.com site is one of the most popular places on the Web.
At the root of the surge are baby boomers who have shirked their anti-establishment beliefs developed in the '60s and '70s and decided that it's okay to play the market. It's okay to worry about stocks. Its okay to become rich--or at least to dream.
According to a recent survey by U.S. Trust Corp. of the wealthiest 1 percent of baby boomers, the stock market has eased their anxieties considerably. In 1993, U.S. Trust President Jeffrey Maurer noted, "they were a stressed-out bunch." Since then, the value of their investments has increased 46 percent, allowing them to add significantly to retirement savings. Their net worth has increased 33 percent.
More and more of the middle class each year has put its savings into the stock market, leaving the markets awash with cash and entrepreneurs with seemingly unlimited options. As the ranks of capitalists expand, the tight lock that bankers and the Wall Street elite once held over the financial markets has dissolved. The result: Markets today are more democratic but also more volatile.
Americans, in fact, now have an almost unreal sense of faith in the stock markets. The U.S. Trust survey, for example, shows that 90 percent of rich baby boomers have left most or all their gains in the market. More than a third believe that the bull market will last more than two years, and another third believe it will last for another year or two.
"Things just don't keep going up 60 or 70 percent," Smith of Hambrecht & Quist warned. "To play devil's advocate: It's a little frightening."
Driving the trend is access to information once reserved for big investors, as the government puts pressure on firms to let individuals in on analyst conference calls, for instance, and make disclosures more widely available. Merrill Lynch will give analyst reports to retail customers. American Express Co. will offer research--and free trading--to people with relatively hefty accounts.
"The information that was once the privilege of big firms is now at my fingertips," said the D.C. senior citizen.
She is a far cry from J.P. Morgan, the powerful American banker, and the cronies he counseled in the 19th century. Back then, Wall Street was truly an insider's place. Financial information was treated like a classified secret.
"J.P. Morgan made money because he had his people on corporate boards and knew what was going on. People paid J.P Morgan to say, 'This is a good investment, but I wouldn't touch that one,' " because they had no other way of finding out, said Richard Sylla, a professor of financial history at New York University's Stern School of Business.
This information blackout meant that the only place average Americans could put their hard-earned savings was banks. Likewise, if an entrepreneur wanted money, he had few other choices but to woo the local banker. The banks made money "by keeping a lot of information private," said Anjan Thakor, a professor of finance at University of Michigan Business School. "It was important for you and me not to see it."
Even at the time of the 1929 crash--which came at the end of a long bull market that had brought new investors--only about 1.5 million Americans were in the stock market, about 1.2 percent of the population. Today 63 million individuals own stock, including mutual funds.
A series of government regulations forcing substantial disclosure, along with deregulation and changes in the economy, began luring more individual stock investors during the 1970s and 1980s. Then, in the 1990s, growth exploded.
In 1986, there were only about 1,800 mutual funds, controlling $700 billion in stocks, bonds and money-market assets. That has risen to 7,665 mutual funds controlling $6.2 trillion in assets, according to the Investment Company Institute.
Today, 77 percent of households' liquid financial assets are in securities and 23 percent are in bank deposits and CDs. As recently as 1985, more than half of those assets were in bank products, according to the Securities Industry Association.
Capital raised for businesses in the United States reached a record $2.5 trillion in 1998, five times the level raised just 10 years ago, according to the SIA.
The New York Stock Exchange announced that it would bring itself public eventually, while Nasdaq announced a plan to raise money through a private placement of securities. They are driven by a wave of electronic communication networks that match buyers and sellers.
Now, these ECNs, many of which are attempting to become stock exchanges, control 33 percent of Nasdaq's volume. In response, the Big Board said it would buy an ECN or build one of its own.
Nasdaq is still much smaller than the NYSE. But it's the growth numbers that tell the story of where the capital is flowing. In 1998, Nasdaq's market capitalization was $2.6 trillion, about 24 percent of NYSE's market cap. Just a year later, Nasdaq's market cap is $4.75 trillion, about 30 percent of the NYSE's.
Initial public offerings, the phenomenon that has really ignited markets this year, were largely a Nasdaq happening. This year, Nasdaq has had 460 IPOs, compared with 50 on the NYSE, where it is still much tougher for companies to list their stocks.
This abundance of capital has financed the Internet boom. Just as the 19th-century gush of capital from Europe helped America develop its railroads far more rapidly than if its owners had to rely on their own funds to pay the bills, the capital surge into U.S. stock markets helped U.S. Internet entrepreneurs develop businesses at a breathtaking rate, Sylla said.
Of course, the whole system may come crashing down if stocks suddenly swoon. No one doubts that stocks are bound to fall at some point. When that moment comes, then the Nasdaq market--which, unlike the Big Board, doesn't have market makers on a trading floor who are required to maintain a stable price in a stock--will really be put to the test.
But for many investors, that appears to be a distant concern. After all, who wants to put cash in money-market funds when there might be another juicy IPO around the corner?