Context
This downturn can be viewed as part of a larger bear market or correction that began in 2000, according to a report by the Cleveland Federal Reserve. After a decade-long bull market had led to unusually high stock valuations. The collapse of Enron is a prime example. Many internet companies (Webvan, Exodus Communications, and Pets.com) went bankrupt. Others (Amazon.com, eBay, and Yahoo!) went down dramatically in value, but remain in business to this day and have generally good long-term growth prospects. An outbreak of accounting scandals, (Arthur Andersen, Adelphia, Enron,and WorldCom) was also a factor in the speed of the fall, as numerous large corporations were forced to restate earnings (or lack thereof) and investor confidence suffered. The September 11 attacks also contributed heavily to the stock market downturn, as investors became unsure about the prospect of terrorism affecting the United States economy.
The International Monetary Fund had expressed concern about instability in United States stock markets in the months leading up to the sharp downturn. The technology-heavy NASDAQ stock market peaked on March 10, 2000, hitting an intra-day high of 5,132.52 and closing at 5,048.62. The Dow Jones Industrial Average, a price-weighted average (adjusted for splits and dividends) of 30 large companies on the New York Stock Exchange, peaked on January 14, 2000 with an intra-day high of 11,750.28 and a closing price of 11,722.98. In 2001, the DJIA was largely unchanged overall but had reached a secondary peak of 11,337.92 (11,350.05 intra-day) on May 21.
The downturn may be viewed as a reversion to average stock market performance in a longer-term context. From 1987 to 1995, the Dow rose each year by about 10%, but from 1995 to 2000, the Dow rose 15% a year. While the bear market began in 2000, by July and August 2002, the index had only dropped to the same level it would have achieved if the 10% annual growth rate followed during 1987-1995 had continued up to 2002.
Read more about this topic: Stock Market Downturn Of 2002
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