This argument certainly carries some weight, but it still needs to be used carefully, because the intensity of the stock market downturn in 2000 varies depending on the index that is being looked at. It is indeed true that the collapse of the internet boom and overinvestment in technology markets has resulted in a sharp fall in the value of technology stocks. Thus the NASDAQ composite index, which reflects movements in such stocks, which rode a wave to cross the 5000 mark in March last years, had fallen by more than 50 per cent to around 2400 by the end of the year (Chart 7).
Chart 7 >>
 
However, movements in the NYSE composite index (Chart 8), while in part a mirror image of the NASDAQ (reflecting movements into and out of ordinary stocks when technology stocks perform poorly or well), fluctuated within a much narrower band and registered on average a rising trend throughout much of 2000. Of course it is true that even the NYSE was on a declining trend towards the end of last year.
Chart 8 >>
 
Given these differences in movements in technology stocks and stocks as a whole, the strength of the “wealth effect” in terms of its impact on consumption would depend on the extent to which shareholders were exposed to technology stocks. There are two reasons why such exposure could have been high.
 
First, managers of mutual and pension funds may have been driven by the lure of quick speculative gains from technology stocks to adjust their portfolios, so as to accommodate a larger volume of such shares. This would obviously result in a much larger fall in the net asset values of their holdings by the end of the year.
 
Second, although shareholding is widespread in the US, the concentration of shareholding tends to be substantial as well. According to the Survey of Consumer Finances, not only did direct and indirect holdings of shares by households (as opposed to various kinds of corporate entities) account for only around 69 per cent of total share ownership, individuals with an annual income of $100,000 or more a year, who accounted for 17.7 per cent of all shareowners, held 63 per cent of shares held by the household sector. Not surprisingly, the volume of trades by this category of shareholder was also higher.
 
It is to be expected that these shareowners, who are in the market largely with capital gains in mind, would have a larger share of risky technology stocks in their portfolio. It is in their case that the “wealth effect” would have been more prevalent, resulting in a sharp increase in consumption demand for durables and luxuries of various kinds during the stock market boom.
 
Not surprisingly, it is durables expenditure that drove the consumption boom as well as led the subsequent slowdown in consumption. A journalistic depiction in the Financial Times, London, of the recessionary mood in the United States titled “Fifth Avenue wealth effect” captures this aspect of the fall in consumer confidence as follows:
 
“Decisions that will determine whether the world economy heads for a hard landing were taken this week - not in the White House, at the US Federal Reserve or on Wall Street but on Manhattan's Fifth Avenue. New York's premier retail street, where Christmas shoppers can buy silk teddy bears from Salvatore Ferragamo for $205, is undoubtedly where you would find Santa Claus if he were a New Yorker. It is also the place to gauge how far recent stock market sell-offs, profit warnings from leading US companies and tens of thousands of job cuts have damped the exuberance of the American shopper. After a decade of unparalleled economic growth, fuelled by a huge increase in borrowing, American household saving is at its lowest level. If consumers decide that lean times lie ahead, spending can be expected to fall sharply. Economic slowdown, even recession, could then follow. The signs this Christmas are that this is exactly what is happening. Retail analysts warn of the toughest trading conditions for a decade.”