Stock prices drop for 3rd year in row

declines accelerate

Corporate scandals, weak economy get blame

$2.8 trillion in wealth erased

January 01, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

Stock market losses accelerated in 2002, handing Wall Street a third straight year of losses as corporate scandals, threats of war and a lackluster economy sapped investor confidence.

Overall, stocks fell 22 percent for the year, shedding $2.8 trillion in value and erasing $7.4 trillion in investor wealth since the market peak in March 2000, according to Wilshire Associates.

"I think everybody is ready to close the books on this one and move on," said James P. Dunigan, chief investment officer at PNC Advisors in Philadelphia. "The third year of negative returns has worn everybody out."

The decline hit stocks across the board.

The Dow Jones industrial average, made up of 30 blue chips, suffered its steepest plunge since 1977, falling 16.76 percent for the year as it limped to a close yesterday of 8,341.63. The annual decline was more than double the 7.1 percent it lost in 2001 and nearly triple the 6.2 percent slide in 2000.

The three-year losing streak was the Dow's first in 61 years.

The Nasdaq composite index - dominated by big technology companies such as Microsoft Corp., Cisco Systems Inc. and Intel Corp. - ended the year down 31.53 percent to 1,335.51 points. It lost 21 percent in 2001, after 39.3 percent in 2000.

The Standard & Poor's 500, a broad measure of large companies' performances, closed at 879.82, down 23.37 percent for the year. It lost 13 percent in 2001, and 10.1 percent in 2000.

And the Bloomberg Maryland Index of 100 companies closed at 187.73, down 12.7 percent for the year. The index was off 3.8 percent in 2001 and 4.6 percent in 2000.

"The third year in a row of lower prices, it hurt a lot of people," said John R. Boo, head of Nasdaq trading at Ferris, Baker Watts Inc. in Baltimore. "You hear all of the jokes of people's 201(k) and 101(k). Pick your number, it is a lot lower than 4[01(k)]."

Experts entered the year optimistic that 2002 would be good for investors and an economy emerging from recession.

But the market was shocked almost from the outset by a series of corporate scandals that sent many investors fleeing.

Just weeks after Enron Corp., the giant Houston-based energy company, collapsed in December 2001, Global Crossing Ltd., the country's largest telecommunication concern, filed for bankruptcy.

Congress and the Securities and Exchange Commission launched investigations into its accounting practices.

In March, Arthur Andersen LLP, Enron's auditors, was indicted on charges of obstruction of justice. Weeks later, Xerox Corp. acknowledged that it overstated revenues by almost $2 billion.

In the next months, L. Dennis Kozlowski, chairman and chief executive of Tyco International Inc., resigned and was indicted. WorldCom Inc., one of the country's biggest long-distance carriers, said it improperly accounted for billions in expenses and filed for bankruptcy. Qwest Communications International Inc. revealed it was under criminal investigation.

These events took a toll on investors. From May 17, when the Dow climbed to 10,353.1, to July 23, the index plunged 2,650.76 points, or 25.6 percent.

"I look at 2002 as the year of the scandal," said Hugh A. Johnson, chief investment officer at First Albany Corp. "The darkest period was really seeing respected executives ushered out in handcuffs. ... These weren't small scandals or swindles, they were million-dollar scandals and even billion-dollar scandals. Investors became so demoralized ... they focused on that and were sellers."

Mitchell Peremel, vice president of Peremel & Co., a discount brokerage in Pikesville, said investors began speculating that the Dow would plummet to 5,000 points.

"People were really throwing them [stocks] down the drain," Peremel said. "Those July lows were pretty hairy."

By Oct. 9, the index hit the year's low of 7,286.27, down 27 percent from the year's start.

Experts hope the scandals are behind the market and they are optimistic about its prospects.

"I'm definitely getting more bullish," Peremel said.

He expects the market to rise 12 percent, fueled by low interest rates, tax cuts and corporations investing money in their operations.

"I see things improving on the corporate side," Peremel said. "You are going to have so much stimulus ... that earnings [will] start coming back."

Joseph V. Battipaglia, chief investment strategist at Ryan, Beck & Co. LLC of Livingston, N.J., is even more bullish.

He said the S&P 500 could rise 20 percent to 30 percent this year, assuming there are tax cuts, a quick end to any war with Iraq, an increase in businesses spending and a general spurt of economic growth.

"There are a lot ifs there," Battipaglia said. "You need the economy to continue to heal itself. What needs to happen ... is that the markets need to improve to get the confidence back. Higher stock prices leads to higher confidence; that is the way it always works."

PNC's Dunigan, who expects the S&P to grow by as much as 18 percent this year, already sees positive signs.

"Investors are beginning to come out of the foxholes," Dunigan said.

Boo, the Ferris, Baker Watts trader, also is betting on a better year for investors, but he has his doubts.

"One thing you can count on is whatever people are predicting isn't going to be right," Boo said. "Who would have figured three weeks ago we'd be where we are with North Korea?

"Fourteen months ago, we got a surprise visit from al-Qaida. Who would have guessed that there has been absolutely nothing from them since them? Count on some big surprise, I suppose."

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