NCPA - National Center for Policy Analysis

Stocks Rose, Then Fell

June 20, 2002

The stock market has lost about a third of its value, or almost $6 trillion, since its peak in March 2000, according to Wilshire Associates. Who's to blame? While it is convenient to blame overstated company profits or misleading brokerage house reports, Robert Samuelson says there is little evidence that manipulation caused the rise or fall of the stock market.

  • About 10 percent of the companies in the Standard & Poor's 500 index have had questions raised about their accounting, estimates analyst Steve Galbraith of Morgan Stanley.
  • While the reported profits of the S&P companies increased 29 percent from 1996 to 2000, the stock market jumped almost three times that (78 percent for the S&P 500).
  • Some corporate executives unloaded stock options before their companies crashed, but many big investors lost big -- for example, George Soros's hedge fund lost more than $5 billion on tech stocks, and some Wall Street firms lent billions to now-bankrupt telecommunications companies.
  • Some stock analysts kept recommending companies despite private doubts, but many others warned that stocks were outrageously overpriced.

Investor mania -- that is, human nature -- is the main cause of the run up of stock prices, says Samuelson. People wanted tech stocks, and Wall Street firms obliged by cranking out IPOs (initial public offerings). In 1999, there were 456 IPOs. About 77 percent of those companies had no profits, says economist Jay Ritter of the University of Florida.

Source: Robert Samuelson (Newsweek), "Think you know whom to blame for market fall?" Viewpoints, Dallas Morning News, June 20, 2002.


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