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Friday, 22 December, 2000, 08:45 GMT
The $3,000bn question
Traders gather outside New York stock exchange, Oct 24, 1929
The Wall Street crash of 1929 has entered US folklore
A dramatic slump in US high-tech stocks has sent shockwaves through the world's stock markets.

The Nasdaq composite has lost more than $3,000bn in value since its height earlier this year - and is showing little sign of a recovery.

Markets always overdo enthusiasm and now they are overdoing the gloom

Justin Urquhart Stewart, Barclays Stockbrokers

Many say the sell-off has been triggered by fears the world's economy is heading into recession.

The question now is what does this dramatic collapse in share prices mean for the world's economy?

Permanent growth

There is little doubt that - after ten years of solid growth - the US boom is finally coming to an end.

Latest figures show growth is at its slowest rate in four years.

The Commerce Department has revised its estimate of growth of gross domestic product (GDP) in the third quarter to 2.2%, compared with a growth rate of 5.6% in the spring.

Consumer confidence has also taken a knock - and there has been a fierce downturn in sales of home computers and mobile handsets.

This, in turn, has led to a series of profit warnings from the big US computer makers and software houses.

Few US analysts dare now to talk of a 'new economic paradigm', a golden era of permanent growth fuelled by high-tech profit growth.

But those at the very heart of the boom - the market speculators who have staked fortunes on it continuing - have been reluctant to accept that it is over.

When the US Federal Reserve met on Tuesday to decide interest rates, many investors were banking on a rate cut to kick start growth.

The stock market rout which has unfolded over the past few days has, to a large extent, been a direct result of traders' adjusting to the fact that the Fed has held its nerve and refused to slash interest rates just yet.

Hints that it might cut rates in the near future did little to calm investors' fears.

Soft landing
US growth slows gradually
Consumer confidence picks up
Investors return to the markets

The Fed has raised interest rates six times between June last year and May this year, as part of an effort to bring the economy slowly back to earth.

The fear now is that it will lurch into recession - with potentially disastrous results for the rest of the world.

Global recession?

In the global economy the share price of a company like Microsoft or Compaq is the first link in a complex, electronic chain reaching out to stock markets in London, Tokyo, Frankfurt and beyond.

Few economies in the world will be untouched by what happens on the Nasdaq and other US markets over the next six months.

And all eyes will be on the Fed to see if it can engineer a 'soft' landing for the world's biggest economy.

Justin Urquhart Stuart, of Barclays Stockbrokers, says: "A stock market slump always has a wider effect on the economy.

Hard landing
Two quarters of negative growth in US economy
Consumer confidence collapses
Investment nosedives

"People are not so confident. They are not spending as much, not buying luxury goods or moving house.

"It will dampen everything. As soon as you see the market going down, there is less enthusiasm for investment.

"There is not less money - just less people investing in new businesses, which are vital to our economy."

Other factors, such as the price of oil, will ultimately determine the severity of any recession and Mr Urqhuart Stewart believes that the current slump is no cause for immediate panic.

"Markets always overdo enthusiasm and now they are overdoing the gloom."

High-tech stocks are more prone to short-lived booms as their share price often relies on perceived value, rather than a solid financial track record.

One positive side-effect of the current slump is that investors may learn to differentiate more carefully between different types of high-tech stocks.

Mr Urqhuart Stewart says: "Asking if you want to buy high-tech stocks is like asking do you like paint?

"There are many different shades and varieties to choose from.

"By lumping them altogether as 'high-tech' you are mixing up companies like, which have no profit record, with something like Marconi, which has a solid record of profit.

"That has been part of the problem."

As the world's stock markets prepare for the Christmas break, traders will be wondering how much further prices can fall.

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See also:

21 Dec 00 | Business
US economy slows sharply
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