NO BULL MARKET IN American history has been so avidly tracked as that of the 1990s. For eight years, we have watched this expanding balloon with a sense of collective wonder, transfixed by our unending prosperity.
Measured purely in terms of popular participation, this market has eclipsed anything seen before. Where only a quarter of Americans dabbled in stocks before the 1987 plunge, nearly half now own stocks, either directly or through mutual funds. By comparison, the roaring market of the Jazz Age, with its paltry 3 million investors, seems a mere sideshow.Yet for all the attention paid to this bull market, few analysts spotted the glaring symptoms of a huge speculative bubble, which was finally pricked this summer by the simultaneous crises in Russia and East Asia. These weren't subtle signals but classic indicators - many of them seen in the 1920s and all of them sadly familiar to students of financial history.
One telltale sign was the way the stock market became ubiquitous in our popular culture, moving from the margins to the center of our consciousness.
And this time, the phenomenon was more pronounced than ever before. Even during the Reagan years, the evening news programs didn't monitor the market closely, whereas in the 1990s Messrs. Rather, Brokaw and Jennings updated us nightly on the market's triumphal march.
During the past two years, the euphoric market has become less a white-collar bastion and more a blue-collar casino. As ever in financial history, the entry of the "little people" onto the financial stage suggested that the curtain was set to drop.
And again, the magnitude of the trend should have made the danger unmistakable. Small investors grew so enamored of stocks that they abandoned the musty security of bank deposits, which now hold just 26.6 percent of household financial assets - the lowest such percentage in 50 years. Today, 57.6 percent of those assets are allocated to equities.
As happened in the 1920s, high-spirited contemporary pundits promised us endless blue skies, a world blessedly free of market corrections, business cycles and bear markets. Their case for the bull market hardened into a mantra, chanted ad infinitum by many brokerage house analysts: the combination of low inflation, low interest rates and slow growth might last forever.
Throw in the productivity of computer technology and a balanced budget and you had an indestructible wealth machine. That a speculative bubble could coexist with a sound economic boom - that it could, in fact, be inspired by an unusually prolonged expansion - was scarcely mentioned as a possibility.
Once these pundits decided that the gods had vouchsafed perfect economic conditions to the United States in the 1990s, they soon concluded that all conventional methods of market valuation were outmoded. We were told that a new era justified whatever giddy prices investors assigned to stocks - the sort of hyperbole that reverberated throughout the '20s, and that should have raised another red flag.
In April, the Federal Reserve Bank of St. Louis reported that the market had attained its highest price-to-earnings ratio in 100 years, sure proof of speculative excess.
One myth of the 1920s was the ardent faith that, with the creation of the Federal Reserve Board in 1913, the United States had acquired a modern financial system that would render crashes obsolete. Similarly, in the 1990s investors endowed Alan Greenspan, the Fed's chairman, with magical powers, assuring themselves that the central banker could curb any sharp fall with lower interest rates.
If some delusions of this bull market recall earlier ones, the 1990s have also written fresh chapters in the annals of financial lunacy. By the market's July peak many stellar high-tech stocks traded at a staggering 70 times earnings, while investors had poured billions of dollars into Internet stocks that were largely bereft of profits.
Just a week ago the stock market richly valued Yahoo! Inc. at more than $9 billion, awarding it a share price more than 300 times its projected earnings for 1998.
Most significantly, stocks came to be seen as suitable both for retirement funds and retirees. Many older Americans now live off dividends from mutual funds, as if stocks were simply turbo-charged bonds. If they sat tight for long periods, analysts told them, their stocks would outperform bonds and other traditional investments. Now many of them are trying to figure out how to survive in a world of skidding stock prices and interest rates.
Tutored to buy and hold stocks and to accumulate on dips, baby boomers in their 40s and 50s have managed to neutralize the stock market's historic fluctuations. Where the Dow had before experienced 10 percent corrections at roughly two- or three-year intervals, the market surged ahead from October 1990 to October 1997 without a single 10 percent correction.
Such investor confidence was hailed as a sign of financial maturity, and for any single investor this patient view seemed sensible. But what's right for one investor can wreak strange havoc when multiplied millions of times. The stubborn bullishness of small investors prevented the market from correcting and cleansing speculative tendencies. It further guaranteed that when the day of reckoning finally came, it would be swift and bloody.
In the end, Wall Street fell back on one last consoling myth: The oceanic flow of cash into mutual funds would buoy the market. Since 1991, $1.1 trillion has flowed into the market via this conduit. By early this year, Americans were channeling $21 billion a month into stock mutual funds.
Why were so many people so blind to impending trouble? Booms tend to enlist the backing of their beneficiaries, and the longer they last, the more partisans they recruit. Brokerage houses touting stocks as safe for ordinary folk tend to play down the market's periodic treachery. Investment banks favor rising markets that accelerate the tempo of mergers and acquisitions and create the right atmosphere for public offerings of start-up companies.
In a boom, it becomes hard for brokerage house analysts to broadcast their secret fears lest they seem disloyal. Our financial service companies aren't always the paragons of objectivity they pretend to be.
The nation's political leaders have largely been mute about the market's vulnerability. In December 1996 Greenspan warned of "irrational exuberance," but he didn't reprise this theme as the market grew even more irrational and exuberant.
The 9,337-point high of mid-July seems a distant memory. It is still unclear whether the recent turmoil represents a chastening correction or the threshold of a grim bear market.
But for millions of investors newly drawn to stocks in the 1990s, it surely represents a loss of innocence.