New Forces Are Now Powering
Dow Industrials Toward 10000
March 15, 1999
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
Where's the market headed? Even better, what stocks are going to be hot
today -- and not? How about tomorrow?
With the Dow Jones Industrial Average standing on the verge of 10000,
the questions are the same as they've always been. But where to look for
the answers isn't.
Not so long ago, information whispered over three-martini lunches moved
markets. Today, markets often are moved by ordinary people
double-clicking a mouse.
That huge shift in the rules of the game helps explain why so many
experienced professionals have embarrassed themselves by
underestimating the bull market's power.
Basic economic forces such as interest rates and earnings still dictate much
of the stock market's direction, of course; the market reacts instantly to
employment figures because they can signal if inflation is rising.
But not so long ago, market experts examined arcane factors such as M-3
money supply, corporate price-to-book ratios, dividend yields, and the
trade deficit. Few bother with such quaint indicators today. The investors
themselves, the information they seek, the ways they exchange it, and the
public figures they look to for guidance about it all have changed radically
since the days when bigwigs drank vodka over lunch.
What moves stocks today are the Internet, instant television analysis and
the explosion of electronic means of moving money. They aren't
necessarily improvements; all seem to have created greater market
volatility. But the theory has it that more information is better than less.
Regardless, these market-accelerators are replacing reasoned analysts'
reports, brokers' recommendations, and the private, inside scoop that
once set market-movers above ordinary Joes.
In fact, the "dumb money" -- the mass of individual investors who once
were viewed as putty in the hands of stockbrokers -- today often can get
information almost as soon as the "smart money." Even conference calls
with corporate chieftains, once the reserve of selected analysts, today are
being opened to the general public, at least on a listen-only basis. That
helps explain why the stock market has become so volatile, and also why
the "dumb" individual sometimes has looked more adept than the "smart"
pro.
"When I first got into the business in the early 1970s, good information
was hard even for institutions to obtain," notes J. Thomas Madden, chief
investment officer at Federated Investors in Pittsburgh. "Now it is
presented to market-savvy grandmas in small towns in Arkansas first thing
in the morning."
When Federal Reserve Chairman Alan Greenspan tells a Senate
committee that he is worried about inflation, when Prudential Securities
technical analyst Ralph Acampora turns bullish or bearish, when Merrill
Lynch Internet analyst Henry Blodget revises targets for Amazon.com, the
news flashes across television screens and the Internet before it hits many
pros' desks. Millions of ordinary investors, including small-time "day
traders" who sit at computer terminals buying and selling stocks, can react
faster than the pros did just 10 or 20 years ago.
Now it is the pros who can be taken by surprise. "The structure of the
marketplace has changed," says Robert Morris, chief investment officer at
New York money manager Lord Abbett & Co. "But as yet, no one really
understands how."
One of the biggest changes is that the agonizingly simple concept of
momentum has replaced elaborate investment models as a driver of
stocks. Stocks rise because, as long as they look strong, investors pile in.
As soon as a stock looks weak, investors pile out. And professionals, who
try to foresee a trend by examining price-to-earnings history and other
once-useful barometers, can get burned.
Momentum-based investing, which has taken the market up, down and
sideways in recent months, is just the most prominent of the new market
drivers.
Liquidity
Talk to stock traders, and they probably will start talking about their
gleanings from the "liquidity numbers" or the "fund flows."
When you see "liquidity," think "savings." During the 1990s, individuals and
their employers have been pumping retirement savings into stocks at
historic rates. For some analysts, that, in a nutshell, is what has been
pushing stocks upward.
"Individual stocks may be driven by earnings, but markets are driven by
liquidity," maintains investment strategist John Manley of Salomon Smith
Barney.
How do you know what's happening to liquidity? One key source: data on
mutual-fund inflows that is released every month by the Investment
Company Institute, a trade organization. Two private data services update
customers on their estimates of the flows every few days.
Trouble is, predicting stock prices based on mutual-fund flows is dicey
business. The ICI numbers always are a month old, and the estimates are,
well, estimates at best. At a time when the overall stock market's value
nears $14 trillion and when billions of dollars in money from pension funds,
foreign investors, private funds, and day traders also are hitting the market,
some experts doubt the importance of mutual-fund flows.
All the same, the mutual-fund numbers are startling. The ICI says stock
mutual funds pulled in just $5.9 billion in net new money in 1984. A
decade later, in 1994, they sucked in a remarkable $119 billion. By 1997,
the figure had nearly doubled to $227 billion. That is a powerful shift.
Last year, a year in which stocks suffered from sharp, painful swings, net
new money into mutual funds fell to $159 billion. For the first year since
1986, more money last year went into money-market funds -- cash -- than
into stock funds. To liquidity devotees, that was a clear indication
individual investors were turning more cautious, and that a big prop for
stocks could be weakening.
The Internet
It may be the "World-Wide Wait," but it is driving stocks.
"I remember in the 1970s, I was visiting a fund company and asked them
where they got their stock quotes," says PaineWebber investment
strategist Edward Kerschner. "They said, 'The Wall Street Journal.' They
didn't even have any quote machines."
Today, the Journal and others offer Internet-based news and information
services. Many individuals receive electronic price quotes on their favorite
stocks at home. Many execute trades electronically, although plenty
complain that their trades aren't executed fast enough.
Gossip from Internet chat rooms and message boards threatens to become
as important as analyst comments: Witness the violent swings in stock
prices of Internet darlings such as record-marketer KTel International or
Internet auctioneer eBay.
Stockbrokers "certainly aren't as important to many investors," adds
William Meehan, chief market analyst at Cantor Fitzgerald. "It is easy to
go online to a site like Silicon Investor and see people scoff at the idea that
people would wait to get a comment from an analyst at some firm, which
might contradict the views that the people at that site have been
expressing."
Mr. Madden of Federated worries that confidence gained from using the
Internet also encourages investors to "surf the wave and ride in and out of
the market. It can lead to assuming levels of risk that later events may
prove inappropriate."
Television
The pros keep an eye not just on their banks of quote machines, but also
on television screens. "In my fixed-income trading room and my stock
trading room, CNBC is on all during the day," says Henry Herrmann, chief
investment officer at Overland Park, Kan., mutual-fund group Waddell &
Reed. He put in TV sets two years ago, when he was upgrading the bond
trading room. "It is just another tool but it is a tool," he says.
When Prudential's Mr. Acampora turned bearish in August and CNBC
relayed his warning of a sharp market drop, the prediction proved
self-fulfilling and helped push stocks down. The experience indicated that,
at the right time, television appearances by any of a variety of market
players can hit the market just as hard as a warning from the Fed's Mr.
Greenspan. And television can turn once-unknown analysts, such as
Merrill's Mr. Blodget, into instant celebrities. (Dow Jones & Co., publisher
of The Wall Street Journal and the Interactive Journal, is a co-owner of
CNBC television operations in Asia and Europe, and provides news
content to CNBC in the U.S.)
Individuals and pros alike probably get more instant information from
television than they do from the slow Internet. A decade ago, the main
place to turn for televised stock news was "Wall Street Week with Louis
Rukeyser." Today, competing channels abound, offering live stock
information for hours before, during and after the trading day.
Television also gets ordinary people tracking indicators that probably are a
waste of their time, such as futures trading in the Standard & Poor's
500-stock index. When the market is closed, TV broadcasts report the
status of the S&P futures. Some people get addicted to the number, even
though it indicates only the direction of the index at the opening bell -- a
direction that often changes five minutes later.
Indexing
Perhaps the single-greatest change in the mutual-fund world in recent years
was the willingness of investors to quit trying to beat the market, and join
it.
Index funds, most of which try simply to duplicate the performance of the
S&P 500 by holding most of the 500 stocks, have been the
fastest-growing single fund category since the end of 1993.
The simple fact of being added to the S&P 500 can mean a 5% boost in a
stock's value, as index funds line up to buy. It helps explain momentum:
The more money that goes into index funds, the more the same big stocks
move upward, and the more investors, who don't necessarily own index
funds, decide to keep buying the big stocks for their own accounts so they
don't miss out.
"The driver in the '80s was greed. The driver in the '90s is fear," says Mr.
Manley of Salomon Smith Barney.
---- Greg Ip contributed to this article. |
