Closing Market Report

Star-Bulletin news services

5-year historical
perspective eases sting
of bear market

The Dow actually is up 5.5%
since the end of 1997

By Hope Yen
Associated Press

NEW YORK >> As painful as Wall Street's three-year slide has been, it might offer some useful lessons. Analysts say investors who stuck with a long-term approach such as buy-and-hold and diversification likely ended up with modest gains, a far better outcome than the market's own tortured and downward path.

The three main indexes posted their third straight year of declines in 2002, the first ever for the Nasdaq and the longest streak for the Dow Jones industrials and S&P 500 since 1939-1941.

It might seem particularly bad since the Nasdaq has dropped 73.5 percent from its peak in early 2000, while the Dow and S&P 500 have lost 28.8 percent and 42.4 percent, respectively.

But that's only if investors, against conventional advice, jumped in at the height of the market and then sold on extreme pessimism. For many who held on, say over a five-year period before the tech boom and bust, the market performance isn't as depressing.

Since the end of 1997, Nasdaq dropped 15 percent and the S&P 500 lost 9.3 percent, but the Dow had a 5.5 percent gain.

As to the biggest winners and losers, "it was all tech, telecom and media," said Robert Streed, portfolio manager of Northern Select Equity Fund.

"Once you get away from those groups, you find stocks had very modest advances that you would expect toward the end of a bull market.

"They didn't have the excesses before the crash, and they didn't get whacked too hard after the crash," he said.

The performance of a handful of high-profile stocks reflects the long-term trends.

Tech stocks such as Yahoo!, which traded Dec. 31, 1997 at a price (adjusted for stock splits) of $8.66, rocketed to a peak of $237.50 by January 2000.

Microsoft zoomed from an adjusted price of $32.31 to $119.12.

Other sectors also benefited long-term, with a modest doubling of gains or more.

Blue-chip stalwart General Electric rose from an adjusted $24.46 to a respectable $60, while drug company Merck climbed from $48.29 to $90.56.

Later, as the tech boom fizzled in the late 1990s and a spate of accounting scandals demoralized investors in 2002, stocks sank.

Yahoo lost 93.1 percent from its peak of $237.50 to $16.35 at the end of this past year, while Microsoft dropped 56.6 percent.

Still, for those bought and held at least five years, the returns among these companies was respectable.

From the end of 1997 through 2002, Microsoft still gained 60 percent, and Yahoo jumped 88.8 percent, although hundreds of other tech companies have fallen precipitously in value or even gone bankrupt. Merck also climbed 17.2 percent.

Among the losers, GE, despite its recent slide, was barely unchanged, dropping just 11 cents, while Disney suffered more, losing 48.2 percent.

"We were coming out of what already had been historically the greatest period of history in the equity markets" in 1997, said Charles White, portfolio manager at Avatar Associates. "You could argue the last five years have been a reversion back to the mean."

So what does that mean for investors as they look to the future?

"Don't get swept up in the story. Look for earnings in hand instead of promised earnings somewhat in the future," Streed said.

White agreed.

"Individual investors have to understand that not everybody's investment objective is to beat the S&P 500 and the Nasdaq," he said.

"For many investors, simply having a pool of money in place, maintain a style of living and allow them to get through the retirement years are enough. For others, it's the ability to pay a college education bill."

"It's important for investors to understand what they're trying achieve. If there's anything the decade of the '90s took from people, it took away their discipline to do that," White said.

For the week, the Dow rose 297.91, or 3.6 percent, to close at 8,601.69.

The Nasdaq had a weekly gain of 38.77, or 2.9 percent, to 1,387.08 and the S&P had a weekly advance of 33.19, or 3.8 percent, to 908.59.

The Russell 2000 index, which tracks smaller company stocks, had a weekly gain of 6.15, or 1.6 percent, to 390.31.

The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 8,593.22, up 287.77 from last week.

A year ago, the index was 10,856.68.

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