Who's in The Path of Falling Dow?

Market Watch

Berea College is a small Kentucky school that prides itself on not charging tuition to its 1,577 students, most from low-income families. Instead, it counts on its endowment, which is invested 60 to 70 percent in the stock market.

During the latest bull market, Berea has been able to hike up faculty salaries and build a state-of-the-art $3.4 million computer network linking the campus.

But with experts cautioning that the days of double-digit returns may be over, the college may have to watch its future spending.

Berea is not alone. Investors from Wall Street to Main Street are watching this month's market dip with growing concern. If it turns into a full-fledged bear market, it could impact everything from state finances to individuals' plans to retire.

"There are some challenges we could not meet if the stock market were not up," says Larry Shinn, Berea's president.

Some 66 million Americans, representing 37 percent of all households, own mutual funds. In polls, some 43 percent of all Americans profess to own stocks, up from 21 percent in 1990. There are millions who have 401(k) plans invested in stocks. Most of these people are hoping the stock market continues its bullish ways.

For example, take Bill Gates and Paul Allen, the co-founders of Microsoft, the Redmond, Wash., software company. This month, they announced they would sell about $1 billion worth of stock, a small fraction of their holdings. The two men combined own Microsoft stock worth $36 billion. But for every $1 drop in Microsoft's stock, Mr. Gates and Mr. Allen lose $363 million.

Last week was not a great week for Gates and Allen (their stock was down $1.75). The Dow Jones Industrial Average finished the week at 8425, down 173 points for the week. Since its July 17 peak, the Dow is down 9.8 percent.

Falling stocks a good deal

For most investors, however, a falling stock market should not be a concern, says legendary stock guru Warren Buffet. Writing in the Berkshire Hathaway annual report, he says stock buyers should be elated when prices fall - they are getting stocks at lower prices. "Only those who will be sellers of equities in the near future will be happy at seeing stocks rise," Mr. Buffett writes.

Well, count among the sad the partners at Goldman Sachs in New York. The partners recently agreed to go public this fall in what is expected to be one of the largest initial public offerings in the nation's history.

If the company were to go public today, the 189 senior partners would be worth $100 million apiece. The company is now using stock to lure prospective hirees.

"For this deal it might not make too much of a difference, but we may see valuations of investment banks drop," says Steve Lacey, senior editor at the IPO Reporter, a Securities Data publication in New York.

While no one may be feeling sorry for a bunch of investment bankers, there are scores of other companies who are counting on a healthy stock market to go public. According to Mr. Lacey, 19 companies have canceled their new stock offerings since August. "It's been pretty tough," he says.

Filling state coffers

The bull market has also become vitally important to New York. Last year, Wall Street firms handed out $12 billion in bonuses. A recent report from the New York State Comptroller found that Wall Street represented 56 percent of the city's growth in real earnings between 1992 and 1997. The average wage on Wall Street was $182,000.

Last year, the taxes on this windfall helped give the Big Apple a budget surplus of $2.1 billion. New York State also had a surplus of $2 billion.

"If there is any downturn, it will have a serious impact on the state's economy," says H. Carl McCall, the comptroller.

Ten years ago, he recalls, Wall Street represented a much smaller proportion of the state and city's revenues. Even then, when there was a downturn, he says, "it had dire consequences."

Mr. McCall is counseling the state and city to pay down debt and put some of the money into a reserve. So far, he says the city has done some of this, but the state is ignoring him.

The stock market's gains are also benefiting all states and municipalities by increasing the value of their pension funds. In New York, the pension fund has doubled in the past four years. This year, for example, the state and localities will have to contribute $208 million less than last year because of the performance.

On the federal level, the stock market may also be helping. This budget year, the government is expecting a surplus of $60 to $80 billion.

"It's one of the leading theories that the stock market is responsible," says Stanley Collender, manager of the federal budget group at Fleishman-Hillard Public Relations in Washington.

Even President Clinton may well hope the market keeps rising. In the past, the inflation rate, unemployment, and per capita income were ways individuals measured presidential economic success.

However, Larry Sabato, a political scientist at the University of Virginia in Charlottesville, believes the stock market is now more important, since nearly half the population has market investments.

"Bill Clinton ought to be the one rooting for 10000 on the Dow - it would be the end of Monica Lewinsky," says Mr. Sabato. "If we fall to 6000, people may be irritated enough to care about the scandals."