A deflating technology bubble, a string of corporate governance scandals and fears of terrorism and war pushed stock market gauges lower for a third consecutive year in 2002. The outlook for equities still looks cloudy, but some Wall Street observers still see reasons to be cheerful about 2003.
In truth, most investors would be content with a year that turns out to be no worse that 2002. It was a year in which fear turned to loathing, in which frustration over a sputtering economic recovery and a succession of high-profile accounting frauds and corporate governance abuses replaced terrorism as Wall Street’s biggest worry.
One year ago, few on Wall Street would have forecast that at the close of 2002 the stock market would be facing a third consecutive year of decline.
In the early days of January 2002 — as the United States was making progress in its war against terrorism — a smattering of encouraging reports pointed to an economic upturn. The economic news, in conjunction with investors’ general eagerness to buy stocks at the start of the year, fuelled a renewed sense of optimism on Wall Street.
How the upbeat got battered down
On Jan. 2, the first trading day of 2002, the Dow Jones industrial average — the market index that tracks 30 leading corporations — was 21.7 percent higher than it was at its post-Sept. 11 nadir (8,236 hit on Sept. 21, 2001). It stood above the psychologically-key 10,000 level. The Dow’s three-month ascent, coupled with early signs of an improving economy, looked set to push stock prices ever higher in early 2002.
“There was a run-up in the early part of the year because many on Wall Street felt that we’d get a strong start after a few poor years,” remarked Alan Ackerman, chief market strategist at Fahnestock. “But the cycle of uncertainty continued; it’s the worst that many of us who have been in the market for decades can remember.”
It began with Enron, the disgraced former energy trader that had filed for bankruptcy in December 2001, crippled by debt. An accounting scandal enveloped the former Wall Street darling, then others like Global Crossing and WorldCom, spreading fears about the soundness of corporate America’s bookkeeping.
And even though the Dow managed to claw its way back to a six-month high in early March, a string of high-profile corporate governance scandals at companies like Tyco International and Adelphia Communications triggered a long and volatile sell-off over the summer and shattered investors’ faith in American business, as greedy corporate leaders took the abuse of executive power to new heights.
Investors’ cynicism for all things Wall Street was perhaps best illustrated by the $50 billion withdrawn from equity mutual funds during the month of July, an all-time record according to Lipper, a company that tracks mutual fund data. The amount surpassed the net $30 billion withdrawn in September 2001 in the wake of the terrorist attacks.
By July 23, after a summer of scandals, disgusted investors had driven the Dow down to 7,702, a three-year low. But the market bounced back the next day, soaring 489 points, or 6.4 percent, to record its second-biggest one-day point gain ever, perhaps driven higher by cathartic relief over the televised arrest of Adelphia founder John Rigas.
Rigas, his two sons and two other Adelphia executives embodied the self-indulgence that had stained corporate America. Early on July 24, the men were paraded in front of television cameras in handcuffs, charged with stealing hundreds of millions of dollars from the cable giant and effectively using the company’s coffers as their personal piggy bank.
The Dow stabilized in the weeks that followed, but still finished the month of August with a loss, as bulls and bears debated whether the market’s late-July low represented a bottom from which the market could begin to recover, or whether more selling was just around the corner.
The bad news bears
In the end, the bears were right. By Oct. 9, talk of a possible U.S.-led war against Iraq over its alleged clandestine weapons program had driven the Dow down to 7,286, a five-year low, while the Nasdaq Composite index slid to a six-year low of 1,114, leading some Wall Street strategists to declare the stock market had finally found a bottom.
But that optimism was short-lived. A strong eight-week rally from the lows of October fizzled in late November and the U.S. stock market is now on track to record a third-straight losing year, something not seen since the 1939-to-1941 period.
Now the Dow is 17 percent below where it started the year and the Standard & Poor’s 500-stock index, one of the broadest gauges of the stock market, is off 24 percent.
After a turbulent 12 months for investors, the anticlimax is nothing new. But with over $7 trillion of investor wealth lost since stock prices began their slide nearly three years ago, browbeaten investors are asking if the stock market will remain above its soon rebound or continue its protracted decline in 2003.

Some on Wall Street see a glimmer of hope. “I think the October low will hold because we’ve made so much progress on the issues that were real problems for the market earlier this year,” said Donald Straszheim, president of Straszheim Global Advisors.
“The corporate governance issue has dissipated, the technology sector is improving and the economy has hit a bottom, even though we aren’t seeing great growth, and that will help company earnings and stock prices,” Straszheim continued. “I think it’s all going to be good for the market in 2003.”
However, Straszheim concede that there may be obstacles to stock market growth. “The economic soft spot we’ve seen could be prolonged and there could be an ugly outcome to the Iraq issue,” he said. “And the recovery in capital spending we’re expecting could be delayed further.”
More bearish observers say equities are still overvalued, earnings growth is moribund and unlikely to support current stock prices and economic growth is tepid at best.
“I’m still amazed by how quickly the optimism returns to Wall Street after any market downturn, especially the ones we saw in July and October this year,” remarked Chip Hanlon, president of Unfunds, an investment consultancy. “The anemic economic growth we’re seeing is still not able to support an increase in stock prices.”
Hanlon also cautions that, after a third-straight down year, the possibility of another year of losses for the stock market, although a remote prospect is still possible. The U.S. stock market hasn’t declined for four-straight years since the 1929-to-1932 period.
“People are expecting next year to be an up year because the market seldom falls for four years straight, but remember that between 1995 and 1999 the market went up around 20 percent a year and that certainly wasn’t expected,” Hanlon said.
“If you’re going to see the stock market to go down for four-straight years it might well be after is has gone through one of the greatest bull markets in history.”