Saturday February 24, 8:39 am Eastern Time
Column: Wall Street's Never-Ending Game
By Pierre Belec
NEW YORK (Reuters) - ``Follow The Money.'' That's the never-ending game on Wall Street. And right now, people are looking for a road map that will show them how to get a jump on the next bull market.
For the past year, the stock market has been a humbling experience for investors. Many people who got rich during the greatest bull market in history are finding out that what came after years of success, was failure.
The money has not disappeared overnight. It has switched to those bomb shelters called money market mutual funds -- which are two times bigger than in 1997 and contain more dough than the U.S. government spent in its budget for fiscal year 2000.
Wall Street veterans say the mountain of cash in money funds will be the rocket fuel that will ignite the next bull market. Ironically, Federal Reserve Chairman Alan Greenspan, whose tight money policy arguably helped destroy a lot of wealth, may be the guy who breathes new life into the market.
Here's how it is supposed to work. The more often Greenspan chops away at interest rates, the less attractive the payout on money funds, and the better the odds that cash will go into stocks as investors become disenchanted with the money funds' poorer return.
``This deteriorating rate of return may be an inducement for more money to come back into stocks,'' says Ned G. Riley, chief investment strategist for State Street Global Advisors, with $680 billion under management. ``So, as the Fed keeps lowering interest rates, the more attractive stocks will be.''
The cash that is sitting in money funds is now earning 1 percentage point less than a month ago after the Fed cut interest rates twice by 50 basis points in January to rescue the economy from the precipice of recession. Another rate cut may come out of the Fed's policy-meeting on March 20.
CASH WILL AGAIN BE TRASH?
But don't bet the ranch yet that cash will again be trash.
First, Wall Street will need to get through one of the nastiest corporate earnings reporting seasons.
``Normally, when the Fed lowers interest rates, stock mutual funds get a boost but this time, things may be different because we are not facing a normal type of business cycle but rather a recession,'' says Peter Crane at iMoneyNet Inc., which tracks money market mutual funds.
He said the stock market may have a replay of 1994 when the central bank was desperately slashing interest rates to jump-start the economy and it took a long time for the benefits to be seen. It was the recession that never seemed to end.
``Even through the Fed in '94, cut interest rates by half to 3 percent, stock mutual funds suffered that year,'' Crane says. ``So those who believed that falling interest rates were good for stocks felt some pain on the way because that strategy does not always apply as smoothly as people would like to think.''
THE HOT MONEY IN MONEY FUNDS
Last year, the average return for money mutual funds was 5.89 percent, annualized, while the Nasdaq market tumbled 39.3 percent and the Dow Jones industrial average fell 6.2 percent, its first down year since 1990.
While money funds returned 5.80 percent in January 2001,
stocks are still struggling with the Nasdaq down 8 percent so far in 2001 and the Dow index off 2 percent.
Big-name stocks on the Nasdaq are under water and only a dinghy full of them are keeping the Nasdaq Composite Index from sliding below the 2,000-point level.
The Nasdaq meltdown has pushed the technology-heavy stock index more than 50 percent below its March 2000 high.
And, the Dow's slide of 8 percent from its peak has forced a lot of investors to rethink, i.e., lower, their expectations for the market's long-term returns. More than $2.2 trillion in stock wealth has gone up in smoke since March 2000, ending a five-year string of double-digit gains between 1995 and 1999.
A record $2.005 trillion is currently parked in money market funds -- $217 billion more than the U.S. government spent in its budget for fiscal year 2000. Less than four years ago, money funds first broke the $1 trillion mark. By comparison, there is $4 trillion in stock mutual funds.
Investors are betting that the Fed will continue to lower interest rates.
FED CUTS WILL DEPEND ON HOW BAD THINGS ARE
But the prospects of continued rate cuts will depend on the depth of the economic slowdown, which some experts have characterized as an outright recession.
What's happened is that Greenspan dropped a big rock in the ocean when he boosted interest rates by 175 basis points between June 1999 and May 2000. The big splash is still being felt even as the Fed hurries to cut interest rates to keep the economy from sinking further.
``Should the stock market slip in the face of deteriorating corporate profitability when earnings are released for the first quarter in March, then the Fed may be in a position to cut rates again,'' says Kathleen Camilli, director of economic research for Tucker Anthony.
Despite the nail-biting about whether the economy is in recession, long-term investors are still hanging tough.
``Even though the quick-trigger, technology-day traders and naive crowd have been burned in the past 12 to 16 months, investors in mutual funds and diversified portfolios have learned that there are periods of underperformance and when stocks are not the goose that lays the golden egg,'' Riley says.
``Probably the good news, at least, so far in this cycle, is that there hasn't been a massive redemption of stock mutual funds. Instead, what we've seen, have been redemptions of underperforming funds into those that have better potential,'' he says.
Indeed, even as the Nasdaq market crashed last year, gutsy investors were running into stocks.
A record $309.3 billion went into stock mutual funds in 2000, according to the Investment Company Institute, an industry trade group, eclipsing the old record of $227.1 billion in 1997.
More fascinating, investors pulled a ``Butch Cassidy and the Sundance Kid'' act in December. As the market went over the cliff, they jumped into stocks. The ICI says $11.6 billion poured into stocks in December, more than twice the $5.5 billion that was taken in during November.
``The behavioral pattern of investors has been very encouraging and if anything, surprising in its tranquility and common-sense approach to the stock market,'' Riley says. ``You can have favorable or unfavorable economics and interest rates but if investors' liquidity is moving in the wrong direction, then the fundamentals won't matter at all.''
For the week the Dow Jones Industrial Average fell 358 points, or about 3 percent, to 10,441.90; the Nasdaq Composite Index was off 162.87 points, or about 7 percent, to 2,262.51 and the S & P 500 slipped 55.67 points, or about 4 percent, to 1,245.86.
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