Here's a statistic for you: American investors have seen more than $3 trillion disappear from their stock portfolios in just the past six months — far more than the gross domestic product of all of Africa.
The sudden loss of wealth from what is now officially a "bear" market is rippling through the U.S. economy, affecting everything from university endowments, to state budgets, to the retirement plans of millions of Americans. Many baby boomers, in fact, are already putting off the day they plan to move into their beach houses — better make that condos.
In its broadest and most immediate sense, the downturn of the stock market is threatening consumer spending and thus the fragile U.S. economy. Economists already see evidence that many householders are getting more reluctant to open their wallets.
With that danger in mind, they now expect the Federal Reserve to drop interest rates another 0.5 percentage point when its policymakers meet Tuesday in Washington. Only a week ago, before the plunge in technology stocks Monday, some Fed watchers were talking of the Fed lowering short-term rates a mere 0.25 percentage points because of some favorable economic statistics for February. The stock market has changed their minds.
Chances for a recession have jumped to 50-50, says Sara Johnson, an economist at Standard & Poor's DRI. The Lexington, Mass., consulting firm previously had put the likelihood of a recession at 40 percent.
Johnson thinks it's possible Fed policy-makers might even slash short-term rates as much as 0.75 percentage point to allay investor fears. The Fed already lowered rates 1 percentage point in two bites in January.
What troubles economists is the "wealth effect." When stock prices go up, investors spend a small fraction of their new wealth on goods and services. When prices go down, they spend less than they might otherwise.
DRI estimates the impact on consumers at about 2.5 percent of net worth each year. Considering that the NASDAQ Composite Index is down 62 percent from its peak a year ago, that figures out to the equivalent of a $125 billion loss in consumer spending.
But the stock market is more than technology stocks. It includes companies making cars and steel, retail companies, financial firms and so on. The stock of many of these firms did well while technology stocks slid — mitigating some of the impact on consumer spending.
Despite the decline in stock-market wealth, Americans are better off now than in 1995, when the market took off. At the end of 2000, household net worth was about 585 percent of disposable income, the amount after taxes that Americans have to pay their bills.
The usual level for this measure between 1946 and 1995 was around 500 percent. It peaked at 630 percent last March. Now experts estimate it's about 575 percent. "Americans have come half way back to historical levels," notes A. Steven Englander, a Salomon Smith Barney economist in London. "They haven't lost it all."
Nonetheless, the wealth loss undoubtedly makes many families feel more vulnerable.
It's also having other effects, including on endowments. A survey by the Chronicle of Philanthropy found that net assets of 128 large foundations fell 0.3 percent last year, after rising 7 percent for two years. The David and Lucile Packard Foundation, holding only Hewlett-Packard stock, was off 25 percent.
For colleges, the bear market may bring higher tuition fees and cuts in capital spending. Berea College in Berea, Ky., which is tuition-free, likes to say that its endowment — mostly invested in the stock market — not only butters the bread, it furnishes the bread.
Next year, however, the college might have to eat a smaller loaf. Ron Smith, vice president for finance, is predicting a 4 percent drop in value for its $880 million endowment. That compares with a gain of 38 percent last year.
Many universities, like many individual investors, are not planning to suddenly bolt the market. At Drury University in Springfield, Mo., Raymond Worley, vice president for administration, says the university looks at the market over three years. "We're in for the long term," he says.
Wall Street's troubles are also of concern to both New York City and the state. When financial markets falter, investment firms often react by laying off a variety of employees, from stock brokers to secretaries. This means lower tax revenues.
So far, though, firings on Wall Street have been modest, especially if compared with those in the manufacturing sector of the economy. Bob Kurtter, an expert at Moody's Investors Service, notes that both the city and state have built large reserves into their budgets and are using conservative forecasts. But the impact on their finances could come later if the downturn persists, he says.
Altogether, when bonds, annuities, savings and other assets besides stocks are included, Americans owned some $30 trillion in financial assets at the end of 2000. That was down from a peak of $31 trillion in March 2000. Even if that number is down $1 trillion or so now, Americans are far from financially destitute.
Nonetheless, the market losses are at least weakening a "safety net" for the economy, says James Glassman, an economist with J. P. Morgan & Co. in New York.
The latest retail numbers show Americans are already tightening their belts. Sales at the nation's retailers were down 0.2 percent in February, the first drop in three months. It followed a handsome 1.3 percent gain in January.