I
Over the long run—years and decades—the stock market rises and falls in line with economic growth and corporate profits. But in the short run—days and weeks—the market bounces up and down randomly, like a cork in a stream. Once the Fed embarked on a policy of raising interest rates, it was eminently predictable that technology and Internet stocks would fall, but it was impossible to know when, though there were hints that the moment of reckoning might not be far away. Outside of the technology sector, much of the market was already in a bear market: during the past year, more than 80 percent of the stocks in the S&P 500 index had fallen by 20 percent or more. The market was becoming much more volatile. Between 1988 and 1995, the Nasdaq moved up or down by more than 3 percent in a day just ten times. Since the start of 2000, there had already been twelve such days, six up and nine down. Even some longtime bulls were getting worried. On March 10, 2000, when the Nasdaq closed above 5,000, Jeremy Siegel, the Wharton economist who had previously argued that buying stocks was a good strategy regardless of their price, told CNN, “a big decline is very possible.”
On Monday, March 13, the volatility resumed. In three days, the Nasdaq fell by almost 500 points before recovering somewhat later in the week. There were signs that the technology wave might be cresting. In two days, March 15 and March 16, the Dow, which had dipped back below 10,000, shot up 819 points as investors rediscovered Old Economy stocks like Ford Motor, Dow Chemical, and Home Depot. At the end of the week, the Dow stood at 10,595.20, up almost 7 percent on the week. The Nasdaq finished the week at 4,798.13, down about 5 percent, and the Dow Jones Internet Composite Index closed the week at 466.5, down about 8 percent. In this confused environment, on Saturday, March 18, Barron’s published a long article about Internet stocks under the headline “Burning Up.” Written by reporter Jack Willoughby, the piece asked:
When will the Internet Bubble burst? For scores of ’Net upstarts, that unpleasant popping sound is likely to be heard before the end of this year. Starved for cash, many of these companies will try to raise fresh funds by issuing more stock or bonds. But a lot of them won’t succeed. As a result, they will be forced to sell out to stronger rivals or go out of business altogether. Already, many cash-strapped Internet firms are scrambling to find financing.1
With the help of a research firm, Pegasus Research International, Willoughby had examined the financial statements of more than two hundred Internet companies. For each firm, he calculated the rate at which it was spending money and compared this to the cash and marketable securities on its balance sheet. His conclusion: within twelve months at least fifty Internet firms would have no money left, and some of them would run out of cash a lot sooner than that. Among the companies facing immediate problems were CDNOW, whose takeover by Time Warner and Sony had recently fallen through; Peapod, the online grocery, and drkoop.com, the medical Web site set up by Dr. C. Everett Koop, a former U.S. surgeon general. The situation facing many other firms was only slightly less dire. MotherNature.com would run out of money in four and a half months. Drugstore.com and PlanetRx.com had enough cash to last nine months; eToys would be out of money in eleven months.
The Barron’s piece was the most damaging piece of journalism that the Internet boom had produced, but most devastating of all was its timing. Investors had been tacitly assuming that Internet companies, whatever their losses, would always be able to raise more cash. For a long time, this had been a reasonable assumption, but given the setbacks already suffered by a number of Internet stocks it no longer was. The Barron’s article pointed out what would happen if the cash spigot got turned off permanently, and Internet companies were left to fend for themselves.
On Monday, March 20, many of the stocks on the Barron’s list fell sharply; it was another bad day for technology stocks generally. The Nasdaq fell 188 points, nearly 4 percent, to 4,610. During the next few days, there was a predictable attempt to discredit the Barron’s piece. “I didn’t set my performance record, which is about the best in the business, with any help from Barron’s,” Alberto Vilar, head of the $700 million Amerindo Technology Fund, declared. Investors who avoided Internet stocks during the next five or ten years would miss “the biggest explosion of profits and growth ever seen,” Vilar continued. Many of the firms mentioned by Barron’s insisted that their burn rates had been overestimated. In some cases, this was true. The magazine’s figures only went up to the end of 1999, since when some Internet firms had raised more money. Amazon.com and Digital Island, for example, had both issued hundreds of millions of dollars’ worth of convertible bonds. But even if some of the figures quoted in the piece were out of date, the overall thrust of its argument was incontrovertible.
Some Internet companies were already facing a cash crunch. Firms like CDNOW and Peapod had seen their stocks collapse, and they didn’t have the option to issue more shares. Theoretically, they could have tried to sell some bonds, but given the state of the market, that would have been a formidable challenge. Even market leaders like Amazon.com and E*Trade were being forced to pay higher yields on their loans because of the growing nervousness among investors. For struggling firms, the only real hope was to find another company either to invest in them or to buy them outright, but that was no easy matter. Potential buyers had an incentive to let the troubled business go bankrupt and then buy its assets on the cheap. Given this environment, the only option for the most cash-strapped Internet companies was to cut costs and hope for the best.
But even while the Barron’s article made investors think about an issue they had been studiously avoiding, it didn’t lead to an immediate slump. After falling for a day, most Internet stocks stabilized. On Tuesday, March 21, the FOMC met to discuss another interest rate hike. During the first three months of the year there had been no sign of an economic slowdown. Consumer spending had been particularly strong, and the overall level of demand was still outstripping the economy’s capacity, which was the reason the Fed had started raising rates in the first place. The FOMC voted unanimously to increase the federal funds rate by another quarter point, to 6.0 percent. Repeating the formula used at its previous meeting, the committee said the economic risks “are weighted mainly toward conditions that may generate heightened inflation pressures in the future”2—an indication that yet more interest rate hikes might still be on the way.
If the Fed had been hoping for an immediate fall in the stock market, it was disappointed. Wall Street had already discounted the rate increase, and all the major markets rallied strongly. The Nasdaq rose by more than a hundred points, the Dow rose by more than two hundred points, and the S&P 500 closed at a new record. Internet stocks also had a good day. Yahoo!, which had split two-for-one a few weeks earlier, rose to 191 3/4, a gain of almost $20 a share. EBay rose by more than $18, to 214 1/2. The buying continued for the rest of the week. On Wednesday, March 22, the Nasdaq jumped another 153.07 points, or almost 3 percent, to 4,864.75. The following day, the Dow rose by 253.20 points, to 11,119.90, its first close above 11,000 in a month and a half. At the end of the week, the Nasdaq was at 4,963.03—almost back to 5,000. Greenspan didn’t comment on these developments, but people on Wall Street did. “The market is spitting in his eye,” Harry Cohen, manager of the Smith Barney Appreciation Fund, told The New York Times.3
Taking advantage of the market’s strength, investment bankers quickly offloaded more Internet companies on the public. Snowball. com, a San Francisco–based company that targeted “Generation i”—the 68 million individuals in the United States between the ages of thirteen and thirty—was one of the IPO candidates. Snowball.com was the twenty-ninth most popular destination on the Web. Its sites included ChickClick.com, for teenage girls, and TheForce.com, for Star Wars fans. Given the fate of iVillage and TheGlobe.com, it was perhaps surprising that investors could be found for an online community that had lost $34.8 million on revenues of $6.7 million in 1999, but they were. On March 21, Goldman Sachs issued 6.25 million shares in Snowball.com at $11, and they climbed to 15 1/4. A week later, Websense, a San Diego firm whose software allowed corporations to track their employees’ Internet usage and prevent “cyberslacking,” the practice of visiting non-work-related Web sites on company time, also went public. Calvin Klein, Compaq Computer, and Morgan Stanley were among the firms that were already using Websense’s Orwellian products. Hambrecht & Quist, which was now part of Chase Manhattan, issued 4 million shares in Websense at $18, and they rose 165 percent to 47 3/4. The successful IPOs showed that investors retained a basic faith in technology and the Internet. The day before the Websense IPO, Cisco Systems passed Microsoft to become the world’s most valuable company, with a market capitalization of $555 billion.
II
Just when confidence seemed to be returning, the stock market came under friendly fire on two fronts. First, Business Week, in an issue that came out on Friday, March 24, ran a cover story on the Wall Street “Hype Machine.”4 After some intrepid reporting, the magazine had discovered that Wall Street was peddling high-risk investment strategies to the public, such as momentum trading and buying Internet stocks. Worse, the media, “including Business Week, have fueled the explosion in do-it-yourself stock picking and short-term trading by amateurs.”5 The article singled out CNBC, noting that it had “become a mainstay of armchair momentum investors” and sometimes served as a “conduit for hype by its guests.” On Tuesday, March 28, Abby Joseph Cohen, of Goldman Sachs, advised investors to lighten up on stocks, particularly technology stocks. Cohen, while claiming she remained optimistic for the long term, said technology was “no longer undervalued” and reduced the share of stocks in her model portfolio from 70 percent to 65 percent. The move stunned Wall Street. It was as if Madonna had advised girls to dress more conservatively. The Nasdaq dropped 124.67 points, to 4,833.89. The next day it fell another 189.22 points, to 4,644.67.
Mark Mobius, a well-known stock market strategist at the Templeton mutual funds group, added to the selling by suggesting that the worldwide mania for Internet stocks was coming to an end. “If you look closely, it’s beginning,” he said on March 29. “Look at the number of Internet stocks that have come off their highs, look at the number of Internet stocks that are below their offering price.”6 In response to these comments, Yahoo! fell $18, to $177; Inktomi fell $23, to $182; and eBay, which a few days earlier had hit an all-time high of $255, fell $25, to $199. The Dow Jones Internet Composite Index dropped by 8.6 percent, to 406. Shares in CDNOW dropped to a new low of $3.50 after the company’s auditors, Arthur Andersen, voiced “substantial doubt” that the online retailer would be able to survive.
Many veteran investors were increasingly alarmed by the market’s manic mood swings. Julian Robertson, the head of Tiger Management, a big hedge fund group, announced that he would start liquidating many of his funds at the end of the month because he no longer understood what was happening in the market. Barton Biggs told CNBC that in his forty years on Wall Street he had never seen anything like the current volatility. Asked about his investment strategy, Biggs said he was “hugging very close to the index” because “I’m scared to be a hero and really go very short tech or raise a lot of cash.” There wasn’t any particularly bad economic news to justify the widespread sense of dread—the Fed’s intention to raise interest rates had been known for months—but that was one of the things that alarmed old-timers like Biggs and Robertson. Stock market crashes often happen in a news vacuum. There was no particularly bad news in October 1929 and October 1987 either, but both episodes were preceded by periods of increased volatility. Volatility is the stock market equivalent of a nervous rash. It indicates that investors are agitated and unsure what is going to happen next. In such circumstances, any hint of bad news tends to get exaggerated, and stocks can move sharply for no apparent reason. The best analogy is with the collapse of a sand castle. There is no way of knowing, in advance, which grain of sand will finally topple the structure, but at some point, if the grains keep getting piled on top of each another, one of them will prove decisive.
On Monday, April 3, the Nasdaq slumped again. This time it suffered its biggest-ever points fall and its fifth biggest percentage fall, tumbling 349.15 points, or 7.6 percent, to 4,223.68. Many analysts blamed the sell-off on the collapse of efforts to resolve the long-running Microsoft antitrust case. Judge Richard Posner, the conservative jurist who had been trying to mediate between the Justice Department and Microsoft, had announced at the previous week’s end that his efforts to broker an out-of-court settlement had failed. Microsoft’s stock fell 15 3/8, to 90 13/16, dragging other technology stocks down with it. But the selling was too broad for the Microsoft case to be fully responsible. The Dow Jones Internet Composite Index fell 13.5 percent, to 332.3. Since peaking on March 10, it had dropped 35 percent. EBay fell 32 3/4, to $143.25; Yahoo! fell 11 1/2, to 160 1/8. In an ominous sign, even B2B stocks faced heavy selling. Ariba fell 16 1/18, to 88 1/16; Commerce One fell 31 1/4, to $118. The small technology issues favored by momentum investors and day traders were hit hardest of all. Redback Networks, not a dotcom stock but a firm associated with the Internet all the same, fell 61 1/4, to 238 11/16; WebMethods fell $51, to $189. These were the sorts of stocks that Alan Greenspan had in mind when he had compared day trading to casino gambling. During the past-twelve months, Redback Networks’ stock had traded between $32.50 and $397. As investors sold technology stocks, many of them switched into Old Economy companies. The Dow rose by 300.01 points, to 11,221.93.
The next morning, April 4, things got worse. After the previous day’s drop, many investors were facing margin calls they couldn’t meet. When they failed to put up the money, the brokerage houses sold some of their stocks to raise cash. This was the traditional recipe for a stock market crash. At noon, the Dow was down by 504 points. An hour later, the Nasdaq was down by 575 points, and the atmosphere on Wall Street was one of near-panic. As luck would have it, Steve Case and many other leading figures from the media world were attending a conference in New York organized by Variety magazine. Between sessions, they ran to the phones to check on the market. Henry Blodget was on the road. Every time he looked at his handheld computer, the market seemed to be down another hundred points. The situation was serious enough for the White House to have its top economic official brief reporters. “We believe that the fundamentals of our economy still look very, very strong,” Gene Sperling, the chairman of the National Economic Council, said.7 It wasn’t the most original statement, and by the time it appeared the stock market had started to bounce back of its own accord, as it is apt to do. When the markets closed, the Nasdaq was down by just 74.79 points, at 4,148.89, and the Dow was down by 57.09 points, at 11,164.84.
Of the buyers responsible for the recovery, some were mutual fund managers picking up old favorites, such as Microsoft, Intel, and Cisco Systems, on the cheap. Many were individual investors following the time-honored method of buying on the dips. EBay closed at $167, up 23 3/4; Yahoo! closed at 167 3/8, up 7 1/4. It had been one of the busiest trading sessions in Wall Street history, a nerve-wracking day to rank with October 1929 and October 1987. On the floor of the New York Stock Exchange, 1.5 billion shares had changed hands. On the Nasdaq’s computers, a stunning 2.88 billion shares were traded. To put these numbers into perspective, on October 19, 1987, when the Dow fell 22.6 percent, about 600 million shares were traded. And at that time a 600-million-share trading day was considered remarkable.
The rest of the week was calmer. On Wednesday, April 5, Alan Greenspan, Bill Gates, and Abby Joseph Cohen were among the attendees at a conference on the New Economy at the White House. With a presidential election just seven months away, the Clinton administration was keen to take some credit for nine years of economic expansion. Investors were more interested in what Greenspan and Cohen might have to say. Greenspan didn’t make any comment on the stock market, but Cohen, perhaps alarmed by the reaction to her previous comments, was reassuring: “For the past decade, we have been enthusiastic about the outlook for stock prices in the United States, and we remain so.”8 The Nasdaq closed the day at 4,169.22, up 20.33 points.
On Thursday, April 6, and Friday, April 7, technology stocks staged a broad comeback. Friday was a particularly joyful day for technology investors, with the Nasdaq leaping 178.89 points, its biggest ever points rise, to 4,446.5. Intel rose by $7, to 136 13/16; Sun Microsystems jumped 6 1/8, to 98 13/16. The news that Jim Clark was preparing to invest another $200 million in Healtheon/WebMD, which in two years had lost more than $140 million, helped to boost Internet stocks. Despite all of Healtheon’s problems, Clark still had faith in his magic diamond. “I am more confident than ever in Healtheon WebMD’s vision on connecting physicians, payers, and consumers via the Internet,” he said. The company’s stock, which earlier in the week had fallen to an all-time low, rose 7 1/2, to 29 3/4. Amazon.com rose 3 5/16, to 67 9/16; America Online rose 3 7/8, to 68 3/4.
Investors headed into the weekend relieved, if a little dizzy. In the month since the Nasdaq topped 5,000, the stock market had shot up and down like a stunt plane. The past week had been particularly unsettling, but after all the gyrations the Nasdaq was just 13 percent below its peak, and for 2000 as a whole it was still up about 6 percent. The Dow Jones Internet Composite Index was 26.4 percent below its peak, but year-to-date it was down just 7 percent, which, compared to previous gains, was only a minor correction.
On the key question of whether the recent volatility had now ended, opinion was divided. Speaking on TheStreet.com’s weekly television show, James Cramer claimed the worst was over: “We’ve got a great low yield on interest rates; we’ve got a Fed that I think is less worried because a lot of the dotcom madness has come out. I see more groups to like than I ever have. This was a very solid week for the bulls.”9 Business Week rejoined the stock market boosters with a cover that asked: “WALL STREET: IS THE PARTY OVER?” The answer, also emblazoned on the front page, was unequivocal: “High-tech stocks are undergoing a much-needed correction. But relax, the overall market probably won’t tank. What we’re seeing looks more like a healthy flight to quality.”10 The Economist, which had warned of a stock market bubble as far back as 1998, was more skeptical. It told its readers that technology stocks “could have further to fall, because their valuations have become so stretched. How stretched is difficult to determine, because traditional valuation methods are not good at coping with fast-growing companies—especially if they have neither dividends nor profits. For what it is worth, however, Nasdaq trades at a price/earnings ratio of 62 times trailing earnings. Between 1973 and 1995, its p/e never exceeded 21.”11
The Economist piece highlighted an important point. In historical terms, technology stocks, particularly Internet stocks, were as overvalued as ever. They had risen to their current heights because investors had been willing to ignore old measures of valuation, preferring to focus on more general justifications of higher stock prices, such as the aging of the baby boomers and the revolutionary impact of the Internet. These arguments were so vague that they could be used to justify practically any level of stock prices. While the market was rising, this vagueness was a great advantage, because it meant there were no limit on the upside. But should stock prices start to fall and keep falling, rather than rebounding as in the week just gone, there would be no logical limit on the downside either—a fact investors were about to discover.
III
On Monday morning, April 10, the technology selling resumed, and this time it continued through the day. At market close, the Nasdaq was down by 258.25 points, or 5.8 percent. Intel fell 5 5/8, to 131 1/8; Sun Microsystems lost 7 13/16, to $91. The Dow Jones Composite Internet Index fell by 37.65 points, or 10 percent, to 337.65. EBay slumped by 25 3/16, to 155 11/16; Yahoo! dropped 9 3/16, to 141 15/16. Again, there was no apparent trigger for the selling, but its intensity forced some of Wall Street’s bulls finally to acknowledge the obvious. “The technology sector has begun an important corrective trend,” said Richard McCable, who had replaced Charles Clough as Merrill Lynch’s senior stock strategist.12 Old Economy stocks rallied: General Motors rose 1 3/16, to $86; International Paper rose $3, to 42 5/8. The Dow finished the day at 11,186.56, up 75.08 points.
The technology sell-off continued on Tuesday, April 11, with the Nasdaq falling by 132.30 points, to 4,055.90, and the Dow Jones Internet Composite Index sliding another 7.1 percent, to 313.83. Again there was remorseless selling of previous favorites: Oracle fell 5 1/8, to 77 3/8; Yahoo! fell 8 1/2, to 133 1/2. At the close of trading, for the first time since the start of February, the Nasdaq was in negative territory for 2000. The only good news was that it hadn’t fallen through the 4,000 mark. At one point during the day, it had come close, but it had bounced back, raising hopes for a more sustained rally.
When the market reopened the next morning, Wednesday, April 12, these hopes were disappointed. Rick Sherlund, a respected analyst at Goldman Sachs, had lowered his revenue expectations for Microsoft, citing lower than expected sales in March, thereby shattering the illusion that the Fed’s effort to restrain the economy wouldn’t have any impact on technology companies. Microsoft’s stock slipped 4 1/2, to 79 3/8. IBM and Hewlett-Packard both fell sharply, too, and they helped to drag down the Dow, which closed at 11,125.13, off 161.95 points. Losers on the Nasdaq included Sun Microsystems, which dropped another 7 7/8, to $80, and Cisco Systems, which fell $5, to $65. The Nasdaq index closed at 3,769.63, down 286.27 points, or 7 percent. The decline in Internet stocks was exacerbated by Forrester Research, which, defying its usual optimism, issued a report predicting the ultimate demise of many online retailers. Said an analyst at the firm: “It’s time to face facts: online retail’s honeymoon is over.” Amazon.com slumped by $7, to 56 3/8, but selling wasn’t restricted to online retailers. America Online fell $3, to 62 1/2; eBay fell 12 7/8, to 142 3/8; Inktomi slipped 12 1/16, to $123. The Dow Jones Internet Composite Index fell by another 10 percent, to 283.33. The index was now 44 percent below its March 9 peak, and the Nasdaq was 25 percent below its March 10 peak, which meant that both were now in a bear market. (A fall of 20 percent or more is usually considered a bear market.)
The same self-reinforcing process that had propelled stock prices into the stratosphere was now operating in reverse, sending stocks hurtling back to earth. The herd mentality was as strong as ever, but investors were now copying each other selling. The technology that had made it so easy to buy stocks made it just as easy to sell them: all it took was a simple phone call or a few clicks of a mouse. As people shifted their savings out of technology funds and aggressive growth funds, mutual fund managers were forced to sell stocks that were already slumping, causing them to fall even further. The deep falls in many stocks prompted more margin calls, some of which couldn’t be met, which, in turn, prompted further selling by the brokerage houses in order to raise cash. The falling market was feeding on itself, just as the rising market had fed on itself.
The morning of Thursday, April 13, brought some relief, with the Nasdaq gaining almost 150 points early on but this proved temporary. A strong retail sales report raised fears of further interest rates by the Fed, and the markets turned around sharply. The Nasdaq ended the day down another 92.85 points, at 3,676.78. The Dow closed at 10,923.55, off 201.58 points. Internet stocks slipped yet again, with the Dow Jones Composite Internet Index falling 5.4 percent, to 267.96. Since the start of the week, Amazon.com had fallen by 29 percent, America Online had fallen by 14 percent, eBay had fallen by 23 percent, and Yahoo! had fallen by 10 percent. Where the bottom would come for these stocks, and many like them, nobody could tell, since even at their reduced levels they were prohibitively expensive according to traditional valuation measures. EBay’s PE ratio was 1,262; Yahoo!’s PE ratio was 389; Amazon.com’s PE ratio was negative, since it was still making a loss.
The Nasdaq’s slide was now dominating the television news and knocking the saga of Elián Gonzalez, whose Miami relatives were refusing to let him be returned to Cuba, off the front pages. Tens of millions of Americans had their life savings invested in stocks. An entire generation had grown up knowing only a rising Dow and economic good times. If stock prices continued to plummet, the prosperity that the country had enjoyed for the past nine years would be threatened, with profound implications for the presidential race, the federal budget, and much else besides.
On the morning of Friday, April 14, 2000, investors tuned in to CNBC and CNNfn with trepidation, especially those with a historical bent. Eighty-eight years before, to the day, the Titanic had sunk. Now, new inflation figures showed prices rising faster than at any point in the last five years. This development, combined with another strong report on retail sales, meant that further interest rate hikes were virtually inevitable. Some analysts were predicting that the FOMC would raise rates by half a point at its next meeting. Shortly after 11 A.M. CNNfn’s Terry Keenan reported: “We are seeing waves of selling hitting the Nasdaq right now. Yahoo! is down seven, Oracle down five, Amazon.com down five, Cisco is down two. And the carnage continues—an incredible sell-off. We are now down in percentage terms more than during the week of the October 1987 stock market crash.” Unlike on Black Monday, when the stock ticker fell hopelessly behind and many brokers refused to answer their phones, there was no outright panic. The trading systems had been improved since 1987, which made it easier to track the market’s fall. At 12:45 P.M., the Dow was down 320.56 points, almost 3 percent, and Nasdaq was down 245.21 points, or 6.7 percent. Losers were beating gainers by seven to one on the Nasdaq and by four to one on the New York Stock Exchange.
If investors were pinning their hopes on an afternoon recovery of the type that had taken place ten days earlier, they were disappointed. At 2 P.M., another wave of margin calls added to the selling pressure, which wasn’t alleviated by Alan Greenspan, who had been making a lunchtime appearance at the American Enterprise Institute in Washington, the scene of his “irrational exuberance” speech in 1996. This time, Greenspan didn’t mention the stock market or interest rates. At 2:45 P.M., the Dow was off more than 500 points, and the Nasdaq was off more than 300 points. The selling continued during the last hour of trading, reversing only slightly in the final few minutes, when a few bargain hunters stepped in. When the closing bell rang on the New York Stock Exchange, the Dow was at 10,305.77, down 617.58 points, its biggest ever points drop. The Nasdaq was at 3,321.29, down 355.49 points. This was not only the biggest points drop ever recorded by the index; it was also the second biggest percentage fall, bested only by October 19, 1987, Black Monday. Taking the week as a whole, the Nasdaq had suffered its worst week in history. After falling for five days in a row, it was down 1,125.15 points, or 25.3 percent, easily surpassing its 19.3 percent fall in the week of Black Monday. The Dow’s slide had been less historic, but it was down 7.3 percent on the week.
The selling on Black Friday, as it came to be known, was across the board. Banks, airlines, and consumer companies got marked down alongside New Economy stocks: Citigroup fell 9 9/16; American Airlines fell $5; Procter & Gamble fell 6 5/8. In the technology sector, the big names all got hit: Cisco Systems fell 4 1/8, to $57; Microsoft fell 5 1/8, to 74 1/8; Intel fell 10 5/8, to 110 1/2. Internet stocks, already battered, were pummeled once more: Yahoo! dropped 20 1/8, to $116; America Online dropped $4.25, to $55; and Amazon.com dropped 1 1/8, to 46 7/8. (Surprisingly, eBay managed to eke out a gain of 3/4, to 139 9/16.) Many smaller Internet stocks were crushed, a fact reflected in the Dow Jones Composite Internet Index, which dropped 31.24 points, or 12 percent, to 236.72. For the week, the index was off 37.1 percent.
After the market closed, the Treasury Secretary, Lawrence Summers, appeared on CNN and issued an appeal for calm: “We are watching the developments in the markets, as we always do, but our focus continues to be on what is most important—the fundamentals of the American economy and their contribution to our economic expansion. And I’m confident that the economy will continue to grow over the next while, with fluctuations from quarter to quarter as always, but our fundamentals are sound.”13 Summers’s words had a familiar ring to them. On October 25, 1929, the day after Black Thursday, President Herbert Hoover said: “The fundamental business of the country—that is, the production and distribution of commodities—is on a very sound and prosperous basis.”
IV
Try as they might, Wall Street’s bulls were unable to write off what had happened as a “healthy correction” or a “flight to quality.” A five-week-long slump had climaxed in a panic. It had been an unusually long crash, but a crash all the same. Since peaking on March 10, the Nasdaq had dropped 1,727.33 points, or 34.2 percent. The Dow Jones Composite Internet Index was down 53.6 percent from its March 9 high. In just one week, $2 trillion of stock market wealth had been eviscerated. Microsoft alone had shed $240 billion in market capitalization since its peak. As for the Internet bubble, it had well and truly burst, as Table 1, which shows the performance of twenty leading Internet stocks during the five-week period from March 10 to April 14, demonstrates:
Table 1:
Internet Stock Prices (March–April 2000)
| 3/10/00 | 4/14/00 | % Fall | |
| Akamai Technologies | 296 | 64 7/8 | 78.1 |
| Amazon.com | 66 7/8 | 46 7/8 | 29.9 |
| America Online | 58 5/8 | 55 | 6.2 |
| Ariba | 305 3/8 | 62 1/4 | 79.6 |
| CMGI | 136 7/16 | 52 1/16 | 61.8 |
| Commerce One | 257 9/16 | 66 | 74.4 |
| DoubleClick | 117 5/8 | 60 9/16 | 48.5 |
| EBay | 193 1/4 | 139 5/16 | 27.9 |
| Excite/At Home | 28 9/16 | 21 3/4 | 23.9 |
| Healtheon/WebMD | 41 | 18 5/16 | 55.3 |
| Inktomi | 169 5/16 | 100 13/16 | 40.5 |
| Internet Capital Group | 143 9/16 | 40 | 72.1 |
| iVillage | 23 7/8 | 10 5/16 | 55.8 |
| Priceline.com | 94 1/2 | 58 9/16 | 38.0 |
| Razorfish | 36 | 15 5/8 | 56.6 |
| TheGlobe.com | 8 | 3 | 62.5 |
| TheStreet.com | 12 9/16 | 5 3/4 | 54.3 |
| VeriSign | 239 15/16 | 97 13/16 | 59.2 |
| Webvan | 11 13/16 | 7 1/2 | 36.5 |
| Yahoo! | 178 1/16 | 116 | 34.8 |
The bullish psychology, upon which everything depended, had been shattered. Even Henry Blodget, the ultimate optimist, conceded that there was little chance of putting it together again, at least for now. “We’re going to see the weaker companies come under more pressure,” Blodget told The Washington Post. “There’s no reason everything should suddenly recover in the near term.”14 In a report issued by Morgan Stanley to its clients, Mary Meeker and her colleagues urged investors to concentrate their holdings in the market leaders like Amazon.com, eBay, and Yahoo! and hang on: “Perhaps we haven’t seen a bottom yet, but for the leaders we certainly should be closer to the bottom than the top.”15 For investors who were still shareholders in Meeker’s other stock picks—Ariba, VeriSign, Healtheon/WebMD, Priceline.com, Women.com, Tickets.com, and the rest—such words offered little consolation.
Even James Cramer, perhaps the loudest and most vociferous voice of the bull market, admitted to Matt Lauer on the Today show that the bubble had burst. “And I can tell you,” he said, “that it’s a sobering and humbling experience. I feel I went from being, you know, top of the game to being pretty humiliated.”16 Stock in Cramer’s company, TheStreet.com, had slipped further during the crash and was presently trading at $5. Asked whether the era of entrepreneurs raising millions of dollars on the basis of an idea had come to an end, he replied, “Yeah, it’s over. The Gold Rush is over.”17