Are the Glory Days Over for the Dip-Buyers?
By GRETCHEN MORGENSON, NY Times
NEW YORK -- Will they or won't they buy the dip?
It has become a Wall Street truth that whenever share prices drop,
bargain hunters throng to the stock market, providing a floor to equity prices
and relief to damaged portfolios. Investors who have courageously waded in
to buy the dips in recent years have saved many trading days from disastrous
falls. And they've made big dough doing it.
Unfortunately, last week, the dip-buyers did a disappearing act. The question
is, will they be gone long?
During the week, the markets certainly gave bargain hunters plenty of
opportunities to buy. The Dow Jones industrial average lost 5.9 percent, and
the Standard & Poor's 500 stock index fell 6.6 percent.
Some market strategists think that the week was an indication that the days
of the dip-buyer may be over. According to these people, investors today are
less likely to jump in when stock prices fall.
There are several reasons for this. Most important, the level of cash that
investors have on hand to put into the stock market is low. For most of the
major investor groups, cash reserves are near the low end of their 45-year
ranges, according to Christine A. Callies, chief United States market strategist
at Credit Suisse First Boston.
In the second quarter, cash in American households stood at 3.59 percent of
total financial assets, a new low and well down from 3.96 percent in the third
quarter of 1998. Borrowings to buy securities, meanwhile, are at a record
$155 billion, compared with $78.6 billion in 1995. Other investors have diminished cash holdings as well. Cash held by
managers of mutual funds stands at around 2 percent of funds' total financial
assets, down from 2.56 percent in the third quarter of last year. And cash
available for investment at non-life insurance companies is 4.51 percent of
total financial assets, the lowest since 1984.
The only investors with a greater cash hoard are life insurance concerns, a
group not known for aggressive forays into stocks.
Even if investors had more funds to devote to stocks, Ms. Callies suspects
that they would not be the asset of choice. "I think that some investors will
still buy the dips but less than would have been the case four or five months
ago," she said. "Confidence in high valuations tends to erode once investors
realize that interest rates are going up."
Dip-buyers have been AWOL in mutual funds as well. Robert Adler,
president of AMG Data Services, said equity funds had net outflows of $1.1
billion in the seven days ended on Wednesday.
Investors have also been abandoning high-yield bond funds, a place where
they had been happy to park their funds during previous periods of market
turmoil.
Last fall, for instance, when the Russian collapse roiled the stock market,
investors still felt comfortable putting money into high-yield funds. But in the
week ended on Wednesday, 168 funds reported net outflows while 125 funds
reported inflows.
So, it seems that well before Thursday, when Alan Greenspan wondered
aloud whether investors were aware of increased risks in stocks, mutual fund
investors had been recoiling from risk.
As Adler said: "When the stock market collapsed last year, money that left the
equity markets was re-allocated to debt. This October, there is no evidence
of a re-allocation. Risk aversion is spreading." |
