Some argue that the stock market downturn was too shallowby Edward Chancellor / February 20, 2004 / Leave a comment
Just under four years ago, in the first spring of the new millennium, the longest bull market in history came to an end. For three years, as the stock market endured a stuttering decline, the Cassandras enjoyed their triumph. However, over the last nine months of last year, shares recovered much of their lost ground. Furthermore, the US economy grew at a startling pace, spreading prosperity to the rest of the world. Despite this good news, most bears have not turned coat and joined the bulls. Now they look a rather beleaguered lot – but their views should not be dismissed.
Economic growth in the US surged last year. In the third quarter of 2003, US GDP climbed by over 8 per cent – its best performance since 1984. A recent survey of US manufacturing showed new orders rising at their fastest rate for half a century. The British economy also produced good news, with manufacturing growing at its strongest rate for four years. Even Germany reported that its manufacturers had enjoyed the biggest increase in orders in three years.
Stock markets too have been looking a lot more buoyant. In the spring of 2003 the decline of the stock market came to an end. For the rest of the year shares rallied. The gains were accompanied by strong corporate earnings growth. The Financial Times has declared the bear market officially over.
Those commentators who had remained optimistic about the prospects for recovery during the bear market were elated by this good news. "The stock market crash of April 2000," wrote Anatole Kaletsky, "has not turned into a thirties-style recession, a profitless recovery, nor even a jobless recovery. It has just turned into a mild, but otherwise perfectly normal, investment-led business cycle."
Alan Greenspan, the veteran chairman of the Federal Reserve Board, has long been scorned by the bears. It was he, in their view, who allowed the bubble to inflate. However, when the bubble began letting out air in the first years of the decade, Greenspan did not stand by. The Fed slashed interest rates from 6.5 per cent in early 2000 to 1 per cent by June 2003. Many bears had predicted that monetary policy would fail to arrest the decline of the stock market. At first, they appeared to be correct. But after the rally of 2003 the Dow Jones regained the talismanic 10,000 mark, not…