Bell Financial Management Corporation

April  was a terrible month for the stock market. The Nasdaq Composite Index (NASDAQ) declined more than 25% during the week of April 10th. It was the worst one-week decline  ever   posted   by a broad
U.S. market index.

The NASDAQ decline was worse than the stock market crash of 1929, or 1987.  The week of the NASDAQ decline ended on an especially bad note on Friday April 14th, with the stock market losing an amazing one trillion dollars of market value, setting another record as the biggest one-day market loss since money was created.

The Dow Jones Industrial Average (DJIA) and the SP-500 index (SP-500) also capitulated during that week, with significant losses, albeit not as devastating as the losses in the NASDAQ.

The only silver lining was that on Friday,  April 14th the stock market finished above its low of the day, or the carnage would have been worse. That week the stock market lost a staggering 2.1 trillion dollars in market value.

The DJIA, SP-500 and the NASDAQ all posted the biggest point declines on April 14th,  called "Black Friday".

The biggest losers were some high technology stocks that investors indiscriminately bid up to unprecedented valuations. Many of those companies have yet to make a profit, most never will. Many investors learned that there is  risk to consider as well as reward when investing in stocks. Many of these "froth" stocks were down more than 50% from their high. Some of these "froth" companies will not survive. Many stocks of companies that do survive will never again regain anywhere near the lofty prices that they once sold for.

The stampede in April showed investors the ugly side of buying stocks without any regard to the price that they pay. Those were the stocks that plummeted in this stock market downdraft.

Investors who were even greedier borrowed heavily to buy speculative stocks on margin and  learned what a "margin call" was for the first time. They were astonished that their brokerage firms sold their stocks off without notice in order to cover the margin call required.

For many, the party of the last five years on Wall Street is over, as all of their paper profits of their stocks evaporated in a flash.

The pain was less severe for investors that were diversified properly and kept their speculative stocks to a small percentage of their portfolio. Many investors however, are reevaluating their portfolios in order to prepare for what is ahead.

What lies ahead for the economy is always unpredictable. However,  with  the Federal Reserve determined to slow the U.S. economy, the outcome could be to push the U.S. economy into a recession which would not bode well for the stock market.

The Fed raised interest rates one half of a per-cent on May 16th. That was the sixth time they raised short-term interest rates since June of 1999. May finished on the upside for most of the stock market as the economic indicators released revealed that the U.S. economy was finally slowing.

New and existing home sales were down in May  as well as new construction. The fact that mortgage interest rates have climbed significantly in the past year and a half has finally had an impact on  the housing sector.

The employment report for May revealed that 116,000 jobs were lost in that month, while the unemployment rate inched up to 4.1% . That was the worst loss of jobs in four years for the U.S. economy.

The economic numbers showing a slowing economy helped
fuel a rally at the end of May. On May 30th the NASDAQ rallied and ended the day up almost 8%, setting close to an all time record for that index, for a one day advance.

June was a choppy month for the stock market. The DJIA was more or less range-bound while the NASDAQ closed in on 4000, fueled by the continuing news  that the U.S. economy is continuing to slow down.

The internet companies that led the frenzy in the stock market the past couple of years however, saw their stocks implode in price as investors finally became more selective in the stocks that they buy.

Many "initial public offerings" (IPOs) continued to be on hold as investors shunned them with a passion.  Investors have even fled stocks like AMAZON.COM, one of the most established internet companies.

The Fed met again on June 28th and decided to stay on hold and not raise interest rates.  They did however, comment that they weren't sure if their campaign starting in June of 1999 of raising interest rates six times was enough tonic to cure the potential inflationary pressures building in the economy.

The challenge for the Fed  is to try to orchestrate a "soft landing" for the U.S. economy, while at the same time averting a recession. The Fed can not be certain what affect their six rate hikes in the past year will have on the U.S. economy, as there is a lag time of six months to eighteen months from the time that they raise interest rates before the full impact will be felt. I have always thought that the Feds stance of trying to preempt inflationary pressures building in the U.S. economy has been misplaced. The reason for my thesis is that companies have very little pricing power as capacity to produce goods and services abound globally. In addition, continued productivity  advances continue in the U.S.,  helping companies to increase their profits while at the same time keeping their prices from rising.

The Treasury yield curve continued to remain negative throughout the second quarter as `long-term interest rates remain  lower than short-term interest rates . A negative yield curve often presages an economic slowdown or a recession, adding more evidence that the U.S. economy may be slowing.

Most of the foreign stock markets are in negative territory in 2000. If the U.S. economy continues to slow, it might further depress foreign stocks as Americans reduce their appetite for imports, which has helped underpin the economies of many foreign countries in the past few years.