Friday, April 14, closed out one of the worst weeks in the history of the United States stock markets. On that unsettling day, the Nasdaq
index plunged by nearly 10% totaling 25.3% for the week. The fall of 7.3% for the Dow Jones industrial average, was the worst since the
index fell 7.6 % in the week ended Oct. 13, 1989.
The meteoric rise in the prices of securities, was sustained by the "New Religion". Central to it was the belief that dot.com companies could
be worth billions of dollars even though the prospects of profitability were more than unlikely.
Much will be written about the events of this period and undoubtedly this saga will continue long after we pen this editorial.
The question as to who won and lost and why, has to be viewed in the framework of macroeconomics. Between Monday and Friday, it has
been tallied that investors lost more than $2 trillion, or $7,000 on average for each person in the United States!
The real life story of the behavior of two investors during that week will show that it is far from clear whether US Fed Chief Alan
Greeenspan will have no further need to continue to raise interest rates. As recently as February 17 we heard him say that: "with foreign
economies strengthening and labor markets already tight how the current wealth effect is finally contained will determine whether the
extraordinary expansion that it has helped foster can slow to a sustainable pace, without destabilizing the economy in the process".
Will the American economy slow? Will the consecutive nine-year growth in the economy come to a grinding halt? Will consumers retrench
and slow down massive purchases of all types of goods? The booming stock market has clearly aided the economy, as investors who felt
wealthier spent more. The anticipation of higher stock prices also helped. One survey late last year showed that the typical investor expected
the stock market to gain an average 19 percent a year for the next decade, a figure that is in line with recent experience but far beyond what
the long-term growth of the economy is likely to support. Investors who held such expectations could have felt less need to save, since they
thought their investments were likely to keep rising.
"We are going to find that this 'tech wreck' and Nasdaq crash will have a much more immediate impact on consumer spending than the
interest rate hikes the Federal Reserve has given us," proclaimed the chief economist of Deutsche Bank Securities. The "wealth effect" or
"poverty effect", as some are calling it, will certainly be a factor in the minds of investors as they examine more carefully their decisions as to
what part of their savings will go for consumption.
It can be expected over the foreseeable future that the growth of the American economy will slow from its torrid rise and the need for
raising interest rates, so harmful to capital markets, will be avoided. Under these conditions the share markets should still produce positive
yields in 2000.
But what of Israel and its burgeoning high-tech universe?
Few doubt that young entrepreneurs harboring expectations of company values expanding unendingly and resulting in the proverbial Wall
Street killing will need to reassess their dreams. The "window of opportunity" which Wall Street had kept open for so long could close for an
indefinite period of time Managers of startup Internet companies may wonder whether it will be at all possible to obtain funding for activities.
For them it is less relevant the whether current market valuations have fallen by billions or even trillions. For them survival will depend on
the willingness of the venture capital industry, including angels, to provide initial backing.
Companies that are in the process of developing their software or hardware systems but without financial reserves, appear to be the most
likely to suffer. Without adequate financing their options will narrow. In the absence of an ability to raise capital they will have to sell
themselves to other companies having the ability to maintain operations. One can only see difficult times ahead.
The individual Israeli investor, as opposed to the professional investor, has recently experienced severe paper losses but with the exception of
those who have invested for the first time in recent months, his investment portfolio is still in the plus column. However, it is unlikely to
assume that under the burden of globally declining prices, investors will exhibit the enthusiasm of recent years for backing young companies
with unproven ideas and euphoric business plans. The expectation of "saner" times is beginning not only to look attractive, but appears to a
prospect around the corner.