1920s / 1930s / 1940s / 1950s / 1960s / 1970s / 1980s / 1990s / 2000s
The nineteen nineties began with war in the Middle East, the threat of a US recession, and a significant drop in stock and bond prices. In response to this investment environment, Tri-Continental Corporation used a two-pronged investment strategy, raising the portfolio’s cash position to 11.2% and increasing weightings in selected sectors such as energy.
In 1991, Operation Desert Storm was in full swing, the USSR disintegrated, and the equity markets resumed their upward march. However, in 1994, the Federal Reserve Board increased interest rates six times, and the DJIA posted a meager total return of 5.02%. Nonetheless, the long-term outlook was improving as interest rates peaked in late 1994, and Congress and the nation moved toward a balanced budget.
Tri-Continental’s managers positioned the portfolio to take advantage of what they believed would be a climbing market by increasing the portfolio’s exposure to a broad range of equities. This strategy proved successful since, by the mid-nineteen nineties, the US economy was expanding and stock prices were soaring.
In 1997, however, the otherwise bright outlook for the US economy and stock market was threatened by trouble in Asia. The collapse of Thailand’s currency was quickly followed by plunging currencies and banking crises throughout Asia.
At first it appeared the fallout would be contained, but in 1998 the “Asian contagion” spread. In August, Russia devalued its currency and defaulted on its debts. Latin American currencies followed and worldwide credit conditions critically contracted. Global stock markets tumbled, and the DJIA fell 15% in one month. Investors feared that the remarkably strong and lengthy bull market, begun at the start of the decade, had come to an end. However, proving its resilience once more, the stock market bounced back and ended the decade at 11497 – a total return of 419% for the ten-year period.
The nineteen-nineties was a remarkable decade for the broad market, the longest bull market in history, and for the US economy, which at the start of the new millennium marked its longest expansion in US history. Investors began to believe that the market and the economy had entered a new age, which many attributed to advances in technology.
Technology was affecting nearly every aspect of life. In the mid-eighties, only 18% of US adults used a computer either at home, work, or school; by the mid-nineties, nearly one-half of US adults used one. More people were logging on to the Internet, and on-line shopping, which became known as e-commerce, grew. People around the world were communicating by e-mail, and cellular phone usage exploded.
Technology was indeed changing the way people lived and worked, and it was impacting nearly every other industry. Against this backdrop, technology stocks climbed to astounding heights. Even the solid performance of the DJIA was overshadowed by the 795% cumulative ten-year total return of the technology-heavy NASDAQ Composite Index.
Technology’s growth changed the very makeup of the market. At the start of the decade, technology represented 7% of the S&P 500; by the end of the decade, this percentage had soared to nearly 30%. The industry’s increasing importance was also reflected in the changing face of the DJIA. In 1999, three technology names – Microsoft, Intel, and SBC Communications – were added. This was the first time stocks listed on the NASDAQ, and not the New York Stock Exchange, were included in the Average.
Investors, eager to participate in this remarkable growth, were soon aggressively pursuing technology companies, especially start-up Internet operations, pushing prices rapidly higher. Small investors, equipped with little more than a computer, began buying and selling these securities throughout the trading day, hoping to realize large profits within very short time periods.
Tri-Continental’s managers believed that many of these stock prices were precariously perched on excitement and hope for the future – and little else.
