Investors Not Biting on Bullish Bait
By Pierre Belec
Saturday August 17, 2002
NEW YORK (Reuters) - "Come back in, the water's fine," say Wall Street experts. But investors have gotten wiser, and they're not biting on this bullish bait from analysts who have been collectively wrong for so long.
Investors have been scorched many times by the stock market and a whopping $7 trillion of their wealth has gone up in smoke since early 2000.
With people intensely risk averse, a new conservatism is developing among investors. Many are convinced the market is not the smart place for their money, and they're ignoring the warning that they may miss out on the next great bull market.
"Repairing of damaged portfolios and rebuilding net worth is the story of upcoming months," says Asha Bangalore, economist for Northern Trust Co. "The extravagant years belong to the past."
Indeed, investors flirting with retirement and even those in their mid-50s are preserving what's left of their shriveled 401(k) money. It will take years, with any luck, for some people to rebuild the wealth lost during the 2 1/2-year bear market.
If an investor bought $1,000 worth of Nortel Networks Corp. (NYSE:NT - News) stock a year ago, the investment would now be valued at $49. The same $1,000 of Enron Corp. stock would be worth $16, less than a case of beer.
DIZZY HEIGHTS
The reality is that the same people who boosted stocks to dizzy heights in the 1990s may now help keep them down for a long time. With money and time running out for the aging population, investors' perception has shifted from greed to contempt for stocks.
A Gallup Poll of more than 1,000 investors said they planned to put off their retirement by 4 1/2 years after the market took a sledgehammer to their retirement nest eggs. Keep in mind the sampling was conducted in January, well before the market took a nose dive.
The betting is stocks will settle in for a post-1970 bubble market. After the "Nifty-Fifty" stock boom era of the early 1970s ended, the market produced flimsy returns until the early 1980s. In the 1970s, 50 stocks ruled the market and every investor wanted to own them. Unfortunately, they fooled themselves into believing the "must-own" stocks would be rewarding forever.
After the crash, the Standard & Poor's 500 index made little headway, creeping up only 6 percent, or at an annualized rate of less than 1 percent, between December 1971 and December 1979.
"One lesson from history is that 'post-bubble' markets do not quickly revert to the returns made in the early bubble years," says Investec Asset Management. "They tend to go through prolonged and difficult adjustments where investors very rarely make money."
With people's appetite for risk at an all-time low, many have opted to stay on the sidelines. Safe has never looked so good for battered investors who have parked their stash in safe havens, such as money and bond funds.
To understand how much damage the stock meltdown has done, it's important to remember that before the stock-buying frenzy was whistled down in early 2000, half of U.S. households had a stake in the market.
Up until the first half of 2002, the market's slow-motion descent apparently was not scary enough to spark a massive retreat from U.S. stock mutual funds as $90 billion in new money poured into them, an amount that exceeded all of last year's total inflow. But this summer's bone-jarring plunge was the wake-up call.
A tornado of fund redemptions -- Wall Street lingo for selling of mutual funds -- has fueled the steepest and most severe market slump in two generations. AS OUTFLOWS GO, SO DOES THE MARKET
After turning a blind eye to 2 1/2 years of losses, investors have thrown in the towel. This "capitulation" has brought awesome market volatility because every wave of selling has set the market up for next sell-off. In July, the Dow Jones industrial average crumbled 1,000 points, then roared up 1,000 before falling 700 and finally snapping back 700 and falling back again.
There was an outflow from stock funds of $1.9 billion through the week of Aug. 7 and nearly $41 billion ran out in July, the biggest monthly drain since AMG Data Services started collecting the data in 1992.
The exodus of money will restrict the ability of fund managers to buy more stocks, which could throw a wet blanket on the market's recovery for a long time.
Feeling betrayed, investors may be reluctant to again risk their retirement money. Many have been fooled too many times by head-fake rallies since the crash began in March 2000.
The average stock mutual fund sank nearly 11 percent in the second quarter. The average fund has lost 9.8 percent so far in 2002, according to Lipper Inc., a fund tracking firm.
The ultra-cautious mind-set of investors is seeping into consumer spending, which has leveled off along with consumer confidence.
The massive loss in household wealth from the market shock is potentially a time-bomb waiting to explode on the Street. Clearly, a drop in consumer spending, which accounts for two-thirds of the nation's economic activity, would bring stocks down another notch before the end of the year.
"Consumer purchases are shifting to accommodate necessities versus want," says Bangalore.
TIDE HAS TURNED
The tide has indeed turned. But Washington and Wall Street are still mesmerized by the illusion the economic recovery is taking on and the massive stock correction was just a speed bump. Any freshman economics textbook will say they're wrong.
U.S. Treasury Secretary Paul O'Neill and Federal Reserve Chairman Alan Greenspan -- the guys who get paid to spot danger on the radar screen -- have early this month sounded optimistic about the economy. Since then, the economic numbers have shown that second-quarter growth slowed to an annual rate of just 1.1 percent. Also, the government made a downward revision in its gross domestic product data for the first quarter. Growth in the first three months of the year was chopped from 6 percent to 5.1 percent.
The bond market is more convinced than ever the Fed will need to lower interest rates to keep the economy from stalling.
The truth is Wall Street had been forecasting accurately for months the economic recovery would lose traction.
This month, cheerleaders of the bull market of the 1990s, gave investors a pep talk to get them back into stocks. Morgan Stanley's chief executive felt "very good about the equity markets" and that stocks were 20 to 25 percent undervalued, which should make "investors more confident in investing in the market."
Merrill Lynch, the world's biggest stock trading firm, is running advertisements in major newspapers in an apparent attempt to drum up business. Under the headline, "There's always a smart place for your money," it urges investors to "Take a breath. Take a step back."
Worth noting is the brokerage houses made no mention of slashing the fees to trade stocks in the same way that Detroit car makers have cut lending rates to zero to spur sales.
Charles Schwab Corp., the giant discount brokerage firm, was more realistic. It cut more jobs this week, saying investors' lack of confidence in financial markets will be long and drawn out. Too much wealth has been lost to expect a quick and painless recovery, it said.
James Dines, publisher of the Dines Letter, an investment publication, says the market is still dangerous and only short-term traders should consider the buy side at this time. Part of the reason is that bear markets can fall and to continue to slide longer than most people think. Lower market lows can beget even lower lows, he says.
"We simply don't trust this market yet," he says. "A rally is possible, but it will not be for everybody. Some investors may not sell and be caught when the tide goes out again later."
For the week, the Dow average inched up 0.4 percent to 8,778, the Nasdaq gained 4.2 percent to 1,361, and the S&P 500 climbed 2.2 percent to 929.
(Pierre Belec is a freelance writer. Any opinions in the column are solely those of Mr. Belec.) |
