My biggest concerns for the coming 6-8 months is Irrational Stupity.
Bugged by Y2K
Investors acting like lemmings could push the Dow down
BY JAMES M. PETHOKOUKIS AND MINDY CHARSKI
Want to know what's truly scary about the Y2K problem? Even if the millennium bug infestation turns out not to be the computer-network-destroying, economy-ravaging plague some doomsayers predict, it could still be a pest for investors. Given the attention the issue is receiving, Y2K fears could send financial markets reeling–even before calendars change on Jan. 1, 2000.
"This could all turn out to be a self-fulfilling prophecy," admits Edward Yardeni, the global investment strategist at Deutsche Bank Securities in New York who has played a major role in raising anxiety by loudly publicizing his doomsday vision. He worries that a crisis in confidence over Y2K will send stocks tumbling before 1999 draws to a close. Those worries could then infect the economy, giving investors something to really worry about. The resulting stock market drop could cause consumers to retrench, leading to a recession.
That's right. Even if your local power grids stay online, your airplane remains aloft, and, most important, you're still able to get quick cash from your local ATM, your portfolio still might be in trouble.
With the Dow Jones industrials zeroing in on 10,000, investors might seem to possess an unshakable optimism. After all, economic fundamentals still look strong. But Minneapolis-based financial adviser Robert Markman says, "People are asking me about Y2K every day and they are petrified." When asked, people say they themselves aren't scared. But they're worried that others will panic and yank money from banks and dump their stock portfolios.
"They fear the fear itself," Markman explains. And it's not just CNBC-watching average investors who are rattled. In a speech last November, Robert Stansky, manager of the $84 billion Fidelity Magellan fund, said he was "truly scared" about the year 2000 and expressed relief that the first day of the new year falls on Saturday, when U.S. markets are closed.
Stockpile. Some trepidation is understandable. Americans are being bombarded with alarming messages about what could go wrong. Groups from the American Red Cross to the Christian Coalition are encouraging people to take precautions in case the power fails, food supplies are disrupted, and the banks shut down. Even some positive news on the problem this month from a Senate study was undercut when Connecticut Sen. Christopher Dodd told NBC's Meet the Press that he still encourages people to do a "little stockpiling" as if they were preparing for a "hurricane." And a USA Today/Gallup poll found that 55 percent of respondents thought it is likely that the banking system will fail.
Those concerns, however unfounded, could translate into shaky financial markets. Robert Shiller, economics professor at Yale, says it is an example of a psychological concept called "anchoring." Given an overall uncertain future, people focus on whatever is concrete. As a result, investors may inflate the importance of the end of the millennium, says Shiller.
If there was ever a bull market vulnerable to investor panic, this might be the one. It is coming off four straight years of 20 percent or more gains, the first time that has ever happened. With record-high valuations, there's plenty of room for stocks to fall. Investors have also seen startling instances during the past two years of how the fear of something going wrong can produce tremendous market convulsions. On Oct. 27, 1997, the Dow fell a record 554 points. Then again last summer, on August 31, the Dow fell 512 points. Each time, the drop was sparked by fears that the economic and financial crises in emerging markets overseas would eventually wash ashore here. That hasn't happened. The U.S. economy is in the midst of a record eight-year expansion. Those market drops didn't have much of an economic impact because they were reversed so quickly.
Don't ask. Yardeni, though, is predicting a scenario a whole lot more catastrophic than a stock crash caused by a bout of millennial market madness. The man who four years ago predicted "Dow 10,000 by 2000" thinks there is a 70 percent chance of a Y2K-led economic downturn ranging from a modest six-month recession and Dow drop of 10 to 15 percent to a global depression lasting two years and the Dow . . . "You don't want to know."
That, to be sure, is a minority opinion on Wall Street. The consensus view among investment pros is that Y2K will be no big deal. It might even help the stock market and the economy. A Y2K study from Morgan Stanley Dean Witter concludes that the problem is unlikely to derail the economy or the stock market. The firm expects that over 95 percent of Standard & Poor's 500 companies will be "essentially" Y2K ready by the year 2000, with the financial sector in the best shape. ATMs should work and investors should be able to access their brokerage accounts. Over at Goldman Sachs, economist William Dudley predicts Y2K fears will actually boost the economy since people and companies will build up inventories of essential supplies and products.
Yet even Dudley admits that "in the end, the fears of Y2K disruptions may have effects on the economy that prove to be larger than the disruptions themselves."
That may provide some profit-making opportunities between now and then. But remember, during this buying spree, fundamentals like price-earnings ratios might not matter much. "What you're really trying to do is anticipate what the nervous are going to do and how you can benefit," says Sam Stovall, an investment strategist at S&P. Here are a few ideas:
The classic hedge in times of crisis is gold. You could shift 5 or 10 percent of assets into bullion, coins, stocks, or funds. But be warned, during the 1990s, gold–with prices at historic lows–has been a poor play during market instability.
U.S. bonds have been the safer haven. Like many Americans, it's likely that foreigners searching for safety will be pouring money into low-risk securities like U.S. Treasury bills and bonds. An increase in demand should drive rates down, making the bonds more valuable.
Speculators who anticipate that panicked consumers will grab canned foods and batteries by the armful may want to buy stock in firms that derive their revenues from such products, such as Gillette (which owns Duracell), Rayovac, Campbell Soup Co., and H. J. Heinz Co.
How about the stores that will carry survivalists' essentials (Wal-Mart, Kroger, Home Depot), or the companies that make generator engines (Briggs & Stratton, Tecumseh)?
It's probably too late to buy stock in software companies that fix Y2K problems (Viasoft, Keane). More attractive might be software developers that are taking a hit now (J. D. Edwards & Co., SAP AG) but should profit when companies fix their bugs and reallocate information-technology budgets early next year.
The best option for most investors, though, is to use Y2K as motivation to review their portfolios. Make sure you don't own more stocks than is appropriate for your long-term financial goals. You could raise cash to buy stocks that are unnecessarily hammered as 2000 looms. Even the bearish Yardeni thinks a correction is more likely than a long-term bear market. So if the past two 500-point market crashes didn't terrify you, Y2K probably shouldn't either.
And for those technophobic worriers out there who think the end is near? Here's a classic what-if situation for crisis investors: Would it be best to buy or sell stocks if you heard that a nuclear attack had been launched against the United States? You would buy, naturally. If the rumor were false, stocks would soar; if true, your portfolio would be the least of your worries. And if the millennium bug does cause the breakdown of Western civilization, the fate of your Amazon.com stock may not seem so important.
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