O.T. But Interesting
The big question: How far is down?
By Zapman, CBS MarketWatch
Last Update: 6:18 PM ET Oct 15, 1999 Letters to the editor (A.k.a. the whine rack.)
SAN FRANCISCO (CBS.MW) -- At last, the market has broken out of the doldrums. You may not be thrilled about the direction, but you shouldn't be surprised. Nor should you be surprised if it heads still lower over the next several weeks. Zapman thinks that's likely.
The Dow's now back around 10,000 and I still think there's a risk it could drop farther, perhaps as much as 2,500 points.
Can you imagine the Dow back under 8,000?
Zapman hates the kind of football game that is played between the 40 yard lines, so the recent market downturn was actually more refreshing than painful. But -- as Alan Greenspan noted in his comments on the "equity premium" -- investors should take a close look at the risk in stocks given the bloated valuations of the equity market. (See full story.)
Translation: These aren't CDs you're buying. They're stocks. And stocks go up, and stocks go DOWN. Sometimes they go WAY down, although it's difficult for investors in the 1990s to keep that in mind. In 1974, the Dow lost 27 percent, and that was only its seventh worst year.
Greenspan and his friends at the Fed have been credited as the geniuses behind the bull market of the 1990s. But somehow, investors go deaf when the Fed warns things could get ugly. The Chairman has clanged the warning bell repeatedly this year, and sometimes the market has hesitated, then resumed its reckless drive higher.
This happened Oct. 5 when the Fed tightened its bias on interest rates. See full story. The Dow closed around 10,400, then rose the next week to 10,648. It's mostly fallen since then, but how low can it go? Greenspan clearly is warning now that it can go much lower. Are you listening?
The Dow's ranged from 7,805 to 11, 429 within the past year. The Nasdaq rose even more sharply. Is it so hard to believe that trend could be reversed?
Watch out below
In my ever-so-humble Zapmanesque way, I've tried to tell you it's time to watch out.
In March, when the Dow was around 10,000, I warned it was possible to fall back all the way to the neighborhood of 7,300.
You can rightly accuse me of being "premature" -- the market rose to 11,428 this summer -- but I'd prefer the word "cautious." The Dow's now back around 10,000 and I still think there's a risk of it falling farther, perhaps as much as 2,500 points. Can you imagine the Dow back under 8,000?
In May, I wrote that while you may enjoy the risky values of Web stocks, you should be ready to pull out because a shakeout is inevitable. (See full story.) It's still true. While some Web companies are sure to flourish, many more are just as likely to see a decline as impatient investors start demanding actual earnings in the months ahead.
Choose wisely
That's not to say there's no value in the market. Just a reminder that you must choose stocks wisely and not expect index mutual funds to behave like passbook savings accounts.
MarketWatch Editor-in-Chief Thom Calandra tells me he thinks the Dow could bottom as low as 8,000, although he sees plenty of reasons to stay invested. "I think the Dow is filled with companies that are extremely undervalued," he told me after Greenspan's latest remarks. "GE (GE: news, msgs) is perhaps the best example -- a company that has its hands in the areas of banking, manufacturing and media around the world. I think fair value is relative, relative to the level of pain -- that is, volatility -- you can withstand in your personal, professional and investing lives."
Markets Editor Kevin Marder noted on Friday there's been a "dramatic shift in sentiment over the past three days from complacency to fear. Since most market bottoms occur amid a climate of investor fear, this is actually a big positive. (Friday's) high level of option buying is evidence of this shift."
Fear vs. panic
True enough, but what that doesn't address is the degree of fear that exists today versus the utter panic that could ensue if the market finds reason -- weak corporate earnings, signs of inflation, another global economic shock -- to send the Dow down another 10 or 15 percent.
Indeed, a sign of inflation came in Friday's PPI report. (See full story.) On one level, that's an isolated statistic, and retail investors are foolish to change their strategies based on a single number. On another, it's a symptom that the Fed was right to tighten its bias earlier this month.
Closing thought: a little back-pedaling isn't such an awful thing in the long-term. The gains of the past few years have, indeed, been a bit irrational. When the dust settles, the market should be far more stable, enabling equities to march forward with a bit more confidence
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