On March 10, in the year 2000, the Nasdaq stock market index burst exuberantly through the 5000 barrier and reached an all-time high of 5132. But even as the Nasdaq was reaching this historic peak, powerful macroeconomic forces were gathering to bring this raging bull to its knees.
The first macrowave blow struck was a regulatory one. It came during the weekend of April 2 when lawyers from Microsoft and the U.S. Department of Justice tried to hammer out an eleventh-hour compromise in the government’s antitrust suit against the software giant. The talks collapsed amid arrogance and acrimony, and when the Nasdaq market reopened on Monday, it wasn’t just the stock of Microsoft that went into the tank. The Nasdaq index plummeted a record 349 points.
The second macrowave blow came quickly on the heels of this Bill Gates debacle, and it was an inflationary one. On April 14, the Bureau of Labor Statistics released data indicating that the Consumer Price Index had taken an unexpected, sharp upward jump. This bleak macroeconomic news sparked a widespread market panic and caused the Nasdaq to plunge 355 points.
With the Nasdaq reeling, Federal Reserve Chairman Alan Greenspan came in with what, in hindsight, would be the knockout macrowave punch. On May 16, Greenspan’s Fed raised the discount rate by 50 basis points. This was not only the sixth Fed interest rate hike in 11 months, it was also the largest. For those traders and investors who had already suffered large paper losses but who still hoped against hope that the Nasdaq would shrug off its fears and quickly regain its lofty heights, this was a stake through the heart.
Indeed, the Nasdaq index would wind up falling over 2000 points in less than three short months. This massive, 40-percent decline not only erased billions of dollars in paper profits for millions of investors, it also completely wiped out thousands of investors who had ridden the Nasdaq wave up on a sea of margin buying and who had been caught without enough cash to cover their margin calls. In the process of this Nasdaq wipe-out, hearts were broken, homes were lost, dreams were shattered, and the biggest of chills descended over an entire generation of investors weaned on upward momentum and extravagant dot-com wealth.
Sad to say, the macrowave worst was still not over. Not by a long shot. For six months more, the market tried desperately to rally—even as thousands of equally desperate traders and investors hung on for dear life. But every time the Nasdaq tried to pull its bloodied and beaten index off the canvas, another roundhouse macrowave punch would come along to slam it back down.
First, there was an avaricious OPEC cartel and a sharp spike in oil prices. This particularly battered transport and technology stocks. Next, there was a severely weakening euro and a dollar far too strong for its own good. This lethal combination not only hit America’s export industries and trade deficit hard, it also threatened to provoke an international currency crisis. Finally, even as Greenspan’s ever-higher interest rates began to take a heavy toll on the earnings of virtually every big-name stock, the nation was hit with the ugliest of presidential election controversies. The ensuing storm cloud of legal and political uncertainties over whether George W. Bush or Al Gore would ultimately be president turned out to be absolutely toxic for both the economy and the stock market.
The result was nothing like the elegant soft landing that Alan Greenspan had futilely tried to engineer. Rather, it was a harsh recession, a Nasdaq sliced in half, a whole army of New Economy stocks left garroted along the information superhighway, and a whole new generation of online traders and investors left gutted by the roadside.
Out of this cataclysmic experience, one lesson has emerged with crystal clarity: Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should—and perhaps more than they have.
The purpose of this book is to help you become a macrowave investor. This is an individual who not only can learn to jump out of the way when the macroeconomic freight train is coming, but who can also jump on that train and ride it for a profit—whichever direction it is going.