In January of 2000 America Online and Time Warner completed what was at the time the largest corporate merger in American history. It seemed to consummate the marriage between finance and technology. The NASDAQ stock index (made up of mostly tech stocks) increased nearly 50% in the fourth quarter of 1999 and finished the year up 85%. The false alarm of the Y2K bug had passed and markets were on a tear. The internet and dot-com-stocks had become a topic of discussion in almost every setting. As a result, 20% (12 of 61) of the commercials that aired during the Superbowl that year featured dot-com companies. In the previous year there we only 2.
Any trained economist or investment professional would be alarmed from a 50% increase in a major index like the NASDAQ over a three-month period. The Federal Reserve must have thought so too because in February they decided to raise interest rates in what seemed to be an overheating economy. Unemployment had dropped to 3.8%, the lowest level since 1969 and labor participation was also at an all-time high. On March 10th the NASDAQ closed at its own all-time high of 5,048; a level it would not see again until July of 2016!
Overall, the first quarter of 2000 was a good one for major markets. The S&P 500 and NASDAQ were both up 2.5% and 12.5% respectively. But things would begin to change during the month of March when Japan announced it had entered a recession which sparked a global sell off of some tech stocks as Japan was a big player in that space. Yahoo and eBay were in talks of merging but abruptly ended those conversations as the temperature of the economy began to change. One headline from Barron’s magazine read: “Burning up: Warning; Internet companies are running out of cash-fast!” In April Microsoft was found to have violated anti-trust laws and many investors panicked thinking the company would be forced to break its self apart. (Spoiler alert: that never happened). On April 14th the NASDAQ fell 9% ending the week down 25%.
As was the case in 2008, the bear market that started in 2000 was accompanied by a presidential election. This time the Supreme Court had to get involved to determine that George W. Bush had won. We all remember the hanging chad fiasco in the state of Florida. The fourth quarter of 2000 was not only chaotic at the polls but in the markets as well. There were two massive bankruptcies that were filed during this time period. One was retail giant Montgomery Ward, which was the largest bankruptcy the industry had ever seen. The other was Pets.com, which was backed financially by Amazon. It closed its doors and filed bankruptcy just 9 months after its IPO! The NASDAQ finished the year down 33% while the S&P slipped 11%.
When the Superbowl aired in 2001 only 3 dot-com companies had purchased ads as compared to 12 the previous year. The economy had begun to lag and the US announced it had entered a recession a few months later. The NASDAQ and S&P finished the first quarter down sharply at -25% and -13% respectively. In an attempt to spark the economy and create a stimulus, congress passed the Bush Tax Cuts in June and all brackets were lowered. Markets responded positively as all major indices were positive for the second quarter of 2001. But things turned sour in September with the 9/11 terrorist attacks. In addition to the attacks, several US senators were mailed a deadly white powder called Anthrax. The FBI called the ensuing investigation “one of the largest and most complex in the history of law enforcement”. The news continued to get worse as the year went on. In October the US invaded Afghanistan, and the Patriot Act was signed into law. In December news began to leak about what would become the nation’s largest bankruptcy filing to date. ENRON had become worthless through corrupt management. The NASDAQ and S&P finished the year both down 21% and 13%. During the next year markets would continue to decline. The NASDAQ finished 2002 down 31% while the S&P posted a 24% decline. All in all, the S&P 500 was down 49% over a 30-month period.
In 1912 John Pierpont Morgan sat before a committee on capitol hill. He was being questioned about manipulating the stock and credit markets. He was asked the following question: “Is not commercial credit based primarily upon money or property?” Morgan replied: “No, sir; the first thing is character. A man I do not trust could not get money from me on all the bonds in the world.” The bear markets and recessions that occurred in 2000 and 2008 were caused by asset bubbles. Investors were being misled. There was a failure of character. In 2000 it was the stock market and in 2008 it was real estate. There was a lot of finger pointing that went on and no doubt there were winners and losers. Today’s crisis feels much different to me. There has not been a failure of character. There are no winners or losers, we are all on the same side fighting an invisible enemy in a virus. People have not lost faith in valuations and there are no asset bubbles. While the economy is facing some very unique challenges today, we will get through it. In 5 years from now the Coronavirus will be a distant memory and we will probably be wondering what the next crisis will be.