to reduce their returns to those of bonds, which implied an astronomical
level for stock prices.^33
Despite the pundits’ preoccupation with the Dow Industrials, the
real action in the market was in the Nasdaq. The once sleepy over-the-
counter market in unlisted stocks soared to preeminence as the public’s
fascination with computers, the Internet, mobile communications, and
networking firms blossomed. Volume on the Nasdaq eclipsed the New
York Stock Exchange, as investors feverishly traded shares in Cisco, Sun
Microsystems, Oracle, JDS Uniphase, and other companies that were
scarcely in existence a decade earlier. The most heated pace of trading
centered on the Internet stocks, where a dot-com index of 24 online firms
soared from 142 in November 1997 to a high of 1,350 on March 10, 2000.THE BEAR MARKET AND ITS AFTERMATH
The date March 10, 2000, marked the peak not only of the Nasdaq but
also of many Internet and technology stock indexes. When capital ex-
penditures in technology unexpectedly slowed, the bubble burst and a
severe bear market began. Measured by the S&P 500 Index, the market
declined by 49.15 percent between March 10 and October 9, 2000, eclips-
ing the 48.2 percent decline in the 1972 to 1974 bear market and the worst
since the Great Depression. There were some redeeming features to the
devastation. Since inflation had been far lower during the recent bear
market, the after-inflation decline was considerably more moderate, and
small stocks did not fall nearly as much in the 2002 bear market as they
did in the 1970s.
Still, the decline in stock values exceeded $9 trillion, by far the
greatest loss in history. The bear market came in two waves. The first
was the popping of the technology bubble, which sent the Nasdaq index
plummeting by nearly 70 percent by the summer of 2001. Nontech
stocks held up very well until the second wave of the bear market, which
was sparked by the spectacular crash of Enron and allegations of ac-
counting irregularities at many firms, including such blue chips as Gen-
eral Electric.
Just as the bull market brought out the optimists, the collapsing
stock prices brought out the bears in droves. In September 2002, BillCHAPTER 6 The Investment View of Stocks 89
(^33) I immediately wrote a rebuttal in the Wall Street Journal(“Are Internet Stocks Overvalued? Are
They Ever,” April 19, 1999, p. A22) stating that their analysis was faulty and that stocks must have
returns exceeding those on U.S. Treasury inflation-protected bonds, whose yield had reached 4 per-
cent at that time.