People always said the mega-boom couldn't last forever, that stocks couldn't always gain 20 percent or more, and that not everyone could be a millionaire. But who really believed it? Well, here we are: With the big stock indexes limping toward their worst annual performances in years, this morning's papers bring a kind of crescendo of pessimism. Of course stocks are up this morning, but still, the Internet gold rush has long since morphed into the long dot-bummer, and keeping track of failed Web companies has become a national parlor game. The companies that many investors came to know more by their ticker symbols than by their actual businesses--MSFT, CSCO, DELL, INTC--are all dramatically off their highs. It's making people cranky. When the Fed didn't charge forward with a rate cut earlier this week, one CNBC pundit called this reticence "lugheaded." None of this is exactly news. But what really seems to be changing lately has less to do with earnings reports or the GNP than with a subtle shift in the culture behind the numbers: We're in transition to new era--suddenly we've become the after-boomers.
But the truth is, the Dow is still more than 50 percent higher than it was when Alan Greenspan made his famous "irrational exuberance" speech just a few years ago. Investors whose experience in the market goes back more than, oh, 18 months have a pretty good chance of being ahead of the game. Most economic indicators still look a lot better than they did five or 10 years ago, and so far no one is predicting that the American GNP is due for a major contraction, just that it's going to grow more slowly than it has. Yet why does this sound so awful to us?
Our confidence built up only gradually, after years of reminding ourselves how tentatively the1990s started out and promising that we would not lose perspective. Back then, just having a job seemed like pretty good news. Then it took not just the job, but the early promotion to feel satisfied. Then it wasn't just the promotion but the calls from the headhunters and the counteroffers and the bonuses. Then the counteroffer wasn't enough, and it took the pile of options at a start-up. Finally it wasn't just the hot start-up job but the chance to sneer at those you left behind as a bunch of jealous and cowardly Cassandras who just didn't get it.
Well, so much for keeping perspective. The fact is it's these very high expectations that are turning the boom into what feels like a boomerang. In a sense, it's the same dilemma of fast success that can cause trouble for a company like Dell, whose stock gets pummeled not because its business is going to hell but because, inevitably, it can't live up to its own dizzying momentum. Imagine a college graduate circa 1993, stepping out into a culture that was about as optimistic as the protagonists of Slacker or Generation X and feeling lucky to land a $17,000-a-year, entry-level gig. Now imagine that Graduate X sees her salary double every few years as she job-hops her way through the snowballing boom, and by her 30th birthday she's firmly in the six figures. Of course, this sort of thing can't last, but it's pretty easy to believe that it might. That's when slow growth suddenly sounds tantamount to hard times. Which brings us to the present moment.
We like to think that we know ourselves when it comes to our own appetite for risk or willingness to splurge. But in the same way that confidence can grow in a sort of feedback loop, there can be a collective effect if everyone gets a little cautious: Venture firm cuts off start-up, start-up lays off your best friend, you decide not to demand a bonus. Or maybe you just skip that splurge on a long weekend in Nevis, not because your immediate material situation has changed, but that you just feel a little less certain about the future. These things add up. Or subtract up.
Few people take risks--like quitting the reality of a steady job for the theoretical riches at a start-up--without having at least some confidence in the likelihood that they will succeed. It seems fair to say that the number of people who have such confidence is lately in fast decline. All of this will be hard medicine for some, I suppose, but it's time to step back and learn again to separate confidence from blind faith. This post-exuberant phase won't be quite as much fun as the era it replaces, but in the long run, a new dose of rationality is probably not a bad thing.