"I Feel a Lot Poorer Today"

By Nancy R. Gibbs

Bernice Garelick, 60, had felt sure that her husband Elias, a dentist, could retire in a few years and spend more time with her. But the crash shook her confidence. The Lindenhurst, N.Y., couple watched helplessly last week as their $300,000 portfolio of stocks sank in value by 20%. Said Bernice: "We have been investing in the market for 22 years. Now this happens, and it threatens what you have worked for over a lifetime."

She spoke for many Americans who felt their life's work and life's savings threatened last week. Since August, the plunging stock market has erased nearly $1 trillion of wealth that people had been counting on to buy new homes, pay tuition or secure retirement. For investors who had scored spectacular gains, on paper at least, the loss was calculated in the thousands, even millions, of dollars that vanished in a few hours.

Harder to measure but perhaps just as costly was the anxiety that rippled through the general public. Though only one in five U.S. households invests directly in the stock market, its gyrations can hurt everyone. People who had never bought a stock in their lives were struggling to figure out what the wild ride on Wall Street meant to them, their jobs, their families and their security. Businessmen feared that queasy consumers might stop spending as freely as they have been in recent years. Workers feared that a market collapse could usher in a recession that would cost them jobs or bonuses or take a bite out of their profit sharing or pensions. Those nearing retirement were concerned about the effect on pension funds and on investments that they will soon have to rely on for income. "It scares me to death," admitted a Miami homemaker, "because the market regulates everything."

Not exactly. But the market's health does have an enormous impact on consumer confidence, and thus on economic growth. The mechanism is as much psychological as it is financial. For the past five years, as long as the economy perked along nicely and the stock market bounded upward, it was easy for Americans to feel prosperous, whether they actually owned any stocks or not. Families were willing to take on mortgages to buy new homes, in part because they believed the economy would continue to grow and the value of the home would appreciate. Those who did own stocks enjoyed a dramatic increase in their paper wealth and felt free to spend more on new clothes, vacations, cars and theater tickets. That fueled the economic growth that fostered the widespread sense of well-being.

For many people watching stock prices plunge last week, that sense of security dissolved. "I feel a lot poorer today," sighed Bee Fitzpatrick, a New Orleans mother of two. Even if the market recovers some ground over the next few weeks, many people will still be uneasy about the future after seeing how far and how fast stocks can fall. As Columnist Robert Reno of Newsday, a New York newspaper, put it, "Nobody who has been on a falling elevator and survived ever again approaches such a conveyance without a fundamentally reduced degree of confidence."

Of course, America's households will not stop spending money altogether, nor will they forget about Christmas, ignore charities and hoard gold. But the market's acrobatics left many people feeling a bit breathless and more than a bit scared. "Who knows what's ahead or how it may affect us?" asked Ed Robert, 53, a commercial-property manager in Houston. "All that fear in the air may trigger a recession and come back to haunt us."

Some families have become leery of going ahead with major expenditures, for fear they might one day need their cash to sustain them through difficult economic times. Auto dealers are already resigned to some falloff in demand until consumer nervousness subsides. Barbara and Jeffrey Colton of East Williston, N.Y., were planning to overhaul their leaky bathroom. But they did not get around to selling the stock they were going to use to pay for the renovation. When the market plunged, the plans were shelved. "Now we're probably going to do a patch job," says Barbara, a substitute teacher. She thinks she may accept some extra assignments that a few weeks ago she would have turned down. "It might not be a bad idea to make some extra money. Maybe I can pay for the bathroom without waiting out the market."

Housing could suffer from falling confidence. In an uncertain environment, young families may be reluctant to build a new home or take on a mortgage. Lower demand, in turn, could drive prices down. One New York City apartment hunter was having second thoughts last week about buying a condominium. "But the seller slashed the price, and we closed the deal," says a broker who represented the buyer. "The market crash saved my client $25,000."

Other sales were sidetracked. Real estate agents reported that some buyers were pulling out of deals at the last minute because the stock they had planned to sell in order to finance the down payment was suddenly worth less. Stan Smith, who sells corrugated containers out of La Grange, Ga., invested his entire $12,000 in savings in the market four months ago to earn enough to buy a house. "It was all so new to me," he says. "I'm the first kid in my family to go to college. I read the Wall Street Journal. And I had really become money conscious. I would say to my girlfriend, 'If we don't go out to dinner, I can buy another share of stock.' " When the market crashed, he found that what was intended as a short-term investment may tie up his money for years. Still, Smith considers himself a little luckier than some other Georgians. Says he: "One of my friends pumped everything he had into the market. He has three kids and one on the way. He sold Monday at a loss. I guess the stock market wasn't the thing to invest in."

Over the next few months, the private decisions of individuals may have a cumulative public effect. Consumer spending accounts for two-thirds of America's gross national product. A significant falloff might prompt retailers to withhold orders and not restock their shelves until demand recovers. Businesses might be forced to cut spending and lay off workers to protect profits. Rising unemployment could slash the income of many households, further depressing retail sales.

Some shopkeepers sensed an instant reaction last week. Helen Rickard owns the Olive Tree, a clothing and gift store in Rockford, Ill. "I find people coming through here and looking and saying 'Just browsing, thank you,' " she says. "It used to be that at this time of year they would at least try things on and put things on layaway to pick up as Christmas presents. But now everybody's apprehensive about turning loose their dollars." She estimates that her sales last week fell by 25% to 30%. "If it's a soft Christmas, I'm in trouble."

Falling sales could lead manufacturers to hold off on expansions. Rather than building factories and buying new equipment, businesses would look for bargains in used plants and machines. That would mean less work for contractors, carpenters and other members of construction crews. Richard Snow, director of the Associated General Contractors of Greater Milwaukee, conceded that area contractors were worried. "No hardhat is going to take a dive off an unfinished apartment building," he said, "but this crash could have serious effects down the road."

John Pratt, 54, who owns a service that supplies temporary industrial workers in Los Angeles, was less concerned about his long-term personal investments than about his business. "If the market hasn't recovered by the time I'm ready to go off into the sunset," he says, "this country is really in trouble. But I suspect that we could see a 10% to 20% drop in demand for our temporary labor as firms start to tighten up."

Owners of new businesses felt the pressure last week as well. Renee Ickson Young, 27, opened her own public relations firm in Manhattan last year. When she heard the news of last Monday's mayhem, she realized that she would have to adjust her business plan. "In a crunch," she says, "the extras are the first things to go at a company, and public relations is considered an extra." Until last week, Jo Ann Coogan, 30, of Dearborn, Mich., was planning to open a small brokerage. But her start-up money was heavily invested in the stock market. "I'm numb," she says. "All of a sudden you see how all of your life is affected by something like this."

Millions of Americans were concerned about what the market decline could do to their profit-sharing, pension and retirement plans. Some people have their Individual Retirement Accounts, for example, heavily invested in the stock market. Of the $1.4 trillion held by the nation's pension funds, roughly half was in stocks before last week. Retirees who are already collecting pension payments under defined-benefit plans are in no danger because of federal pension-insurance guarantees. Nonetheless, most pension funds have taken a beating over the past three months. A firm that finds its pension plan underfunded might have to dip into earnings or borrow from outside sources to meet its fixed obligations in the short term. Since pensions are based on salary scales, companies may choose to hold down wage increases to lower pension costs. Over the longer term, if the market stays depressed and squeezes earnings, many firms might be forced to reduce benefits for future retirees, postpone new investment or even cut their staff to restore solvency.

At least some workers felt an immediate impact on their retirement prospects. In Wisconsin the State Employees Pension Fund suffered an estimated 20% loss in market value for the week. That decline caused some legislators to question whether the state could afford a proposed early-retirement bill that would have allowed some workers to start collecting their pensions at 55 rather than 62.

For retired people who supplement their Social Security with income from investments, the market had seemed a fairly benign environment in which to nurture a nest egg. But no longer. In Billings, Mont., Broker Ronald Scariano was besieged by calls from elderly clients. Some wanted to sell as the market slid downward, but Scariano held them off. "As long as they know that General Motors will keep paying dividends, they're O.K.," he said.

While younger investors can afford to ride out the market and avoid taking a loss until they sell their stock, some older shareholders do not have that flexibility. "At my age," says Don Fuchs, 64, a fund raiser for a Pasadena, Calif., medical research institution, "I don't have time to recoup if I take losses." He thinks back to August, when the Dow hit 2700 and he thought about selling. "But due to inertia and no feeling of urgency, I didn't." He suffered a paper loss of about $75,000.

Some people escaped in time. "It just seemed like the stock market was getting out of hand," says Peggy Anderson, whose husband John recently retired from his job as a pilot for United Airlines. The McHenry, Ill., couple live off the income from his pension, Social Security and investments, and were thankful to have sold most of their stock holdings before last week's plunge. "It was just a matter of how far it would go before it tumbled."

By and large, investors and non-investors alike emerged chastened and a bit more cautious than they had been before. Though some were eager to get back into the stock market to hunt for bargains, many decided to watch their spending more carefully and increase savings. That will weaken the economy in the short run, but it may produce at least one positive side effect. The newfound prudence could ultimately prove a benefit to a country that for years has been dangerously overborrowing and overspending.

With reporting by Don Winbush/Miami and Richard Woodbury/Houston, with other bureaus