Tiptoeing Through the Tulips
The US, with a negative savings rate, continues to borrow from the rest of the world to buy stocks.
It was when day traders began buying tulip futures that the professionals started to get nervous. The arrival in the Dutch tulip market of small-time investors - weavers, spinners, grocers - drawn by news of the rising prices of tulip bulbs, marked the beginning of "tulipomania". From that point, in about 1634, it was only a matter of time before the inevitable crash.
On the surface, the parallels with the US are a little too close for comfort. According to Edward Chancellor's history of financial speculation, Devil Take the Hindmost, the hallmarks of the Dutch economy of the 1630s were optimism about the trade outlook, a thriving stock market, rising house prices and a consumer boom.
In the US, the last three factors are closely linked. Consumers are spending more because they feel wealthier as a result of gains in stocks and real estate.
More Americans now own shares, either directly or indirectly, than ever before. According to a survey published last month by the Securities Industry Association and the Investment Company Institute, 49.2m US households - nearly half - own equities, either as individual stocks or through mutual funds.
Separate figures from the Federal Reserve, collated by Credit Suisse First Boston, suggest that equities now make up a record proportion of ordinary Americans' total financial assets: more than 60 per cent. The value of households' direct stake in equities is approaching $7,000bn, well over three times the 1990 figure, and represents some 40 per cent of the market. A further 30 per cent is held by mutual funds and private pension funds.
Not surprisingly, who US investors are and how they might react to a market correction are matters of concern at the highest level. The Fed used to get nuisance mail from retired savers when it cut interest rates, because a reduction hit interest income. Now when it meets to discuss the possible tightening of monetary policy, as it does this week, the central bankers must consider the reaction of a market propped up on millions of mutual fund savings programmes, pension plans and, yes, day trading accounts.
Day traders are, happily, the least of the Fed's worries. Most US retail investors are comparatively unmoved by stock market turbulence, according to the SIA/ICI survey.
The typical equity owner is a married 47-year-old with household income of $60,000 and assets of $85,000. True, if this model of calm and stability is using the internet to trade he or she is probably trading at high volume - but only 11 per cent of US investors were trading online when the survey was conducted in January and February this year.
The average investor is more likely to seek professional investment advice, views shares as a long-term investment (96 per cent) and does not worry about short-term fluctuations (83 per cent). In 1998, a pretty scary year for all financial markets, nearly half of those investors who owned individual stocks neither bought nor sold. And at least three quarters of those who sold stocks or mutual funds reinvested all or part of the proceeds in the market.
That seems to back up the theory that retail investors "buy on the dips" in the market and that it would take a large jolt to dislodge them altogether. A market crash would dispel the wealth effect, but US consumer confidence has proved resilient in the past. Christine Callies, CSFB's US market strategist, points out that even after the multiple shocks of the 1987 stock market crash, rises in interest rates and increases in capital gains tax, "it still took two years before retail activity collapsed".
So, a sustained dose of disappointment about returns from the equity market may be the only development likely to dent American shareholders' stoicism. Many investors now appear to believe that recent past performance is a guide to future results. According to PaineWebber and Gallup's monthly investor optimism index, shareholders expect returns from the equity market in the coming year of 15.7 per cent and average annual returns over the next 10 years of 16 per cent. At those rates it would indeed appear foolish to switch out of shares and that message is being peddled to a growing number of Americans.
The problem is that while investors in large US company stocks have seen a compound annual rate of return in the 1980s and 1990s of more than 17 per cent, only two other decades since the First World War (the 1920s and the 1950s) have registered double figures. Tulips, anyone?
The Financial Times, November 15, 1999 |
