Investors' Fearlessness Frightens Some Observers
By Sharon Walsh
Washington Post Staff Writer
Sunday , May 14, 2000 ; H01
NEW YORK ?? Call it what you will. Assurance. Confidence. Exuberance. Enthusiasm. Great expectations.
Investor optimism, despite recent dips in the market, is high. It's not just the analysts and traders on Wall Street. At dinner parties and on the subway, in the doctor's office and jogging in Central Park, every investor is an expert who thinks the market has a limited downside and an unlimited upside.
"Of course it will go back up."
"Where else would you put your money where you can get a return as good as the stock market?"
"Even if it goes down for a while, it will ultimately go higher."
These are the sentiments of a bullish investing public assured by the longest economic expansion in American history and a stock market that, even when it drops precipitously, seems to bounce back like a rubber ball.
But recently the ball has not been bouncing quite as high. It is going down two steps and coming back one, rolling down three and coming back two. Ultimately, it's doing a slow bleed, some analysts say.
The Nasdaq composite index has lost about one-third of its value since it peaked on March 10, and the Dow Jones industrial average has been nearly stagnant, dropping less than 1 percent since its high on Jan. 14. Indeed, the Dow is virtually unchanged from a year ago.
Even after the 9.67 percent plummet in the Nasdaq on April 14, investors came back into the market shopping for bargains and sent the index up 6.56 percent the following day. PaineWebber Inc. and the Gallup Organization were scheduled to complete their monthly survey of investor optimism on April 16, the Sunday after the Nasdaq slid. When they extended their poll for an extra day to see how investors reacted to the plunge, they found that the respondents' attitudes were even more positive. When asked if they thought it was a good time to invest in the financial markets, 74 percent answered "yes," compared with 73 percent before the April 14 plunge.
"What individual investors learned from October 1987 is 'Don't panic. And buy on the dips,' " said Frank Fernandez, chief economist for the Securities Industry Association (SIA). "People know no fear."
Fernandez is part of a rising chorus of economists, Federal Reserve analysts and portfolio managers concerned that investors may be too complacent in light of rising interest rates and stock prices that remain high according to traditional measures of valuation. But confident investors have helped the market recover from numerous declines and kept the incredible growth engine running. If investor optimism fades, analysts say, it will be harder for the market to rally. Fernandez, along with other market watchers, believes there is more than enough reason for fear.
"We haven't found a bottom yet in this correction," he said. "We are in an incredibly high and highly volatile trading range. There's significant downside risk and limited upside risk."
Take last week. After being battered the first three days on various economic reports and news of problems for individual technology firms, the Nasdaq composite index recovered somewhat on Thursday and Friday but ended the week down 287.76 points, or 7.5 percent. The Dow was up 31.51 points, or 0.3 percent.
"I don't care what the psychology is in terms of buying on the dips. It takes money to make the economy and the markets go," said Hugh Johnson, chief investment officer of First Albany Corp. "Because the Fed is leaning toward restraint, there's just not as much money to drive the economy and the markets. Something's got to give."
But investors who are buying on the dips aren't buying that argument.
" 'Buy the dips' has worked almost 100 percent during this very long bull market," said John Mannino, a 46-year-old Philadelphia consultant in hospitality sales and marketing. Mannino, who is on the board of the American Association of Individual Investors, thinks the key is to buy strong companies, "like the leaders in the technology and biotechnology fields," when the market is down.
"I really think now is a great time to get in on some of these great companies," Mannino said. "You may have to be more patient and not get rich overnight. Maybe wait 18 months or so."
But 18 months is a long time for some investors. Four years ago, according to figures from the SIA, the average holding period for a stock was a little less than a year. Now it is about 90 days. A recent study by the University of California at Davis showed that investors' performance is inversely proportional to the frequency with which they trade.
The current optimism is like a virus that is spreading and has no treatment. It seems immune to threats of continued interest-rate increases and the predicted high rate of failures of a number of "new economy" companies once their sources of cash dry up.
A number of experts have tried to explain what causes this seemingly unquenchable bullishness: It's part of the American character to believe in financial independence. It's peer-group pressure. Baby boomers and Generation Xers believe they can control their own financial destiny by using the market. Lotteries and legalized gambling have upped our exposure to and tolerance for risk.
"Everybody has a brother-in-law who's done fabulously in the market," Fernandez said. "It's a sense of 'I'm entitled, too.' They don't want to believe they've missed the party."
The number of people who want to come to the party has not abated. While some conservative investors have pulled money out of the market to wait for a further dip, as many as 20 million new trading accounts were opened in the six months between October and March, Fernandez said. Only a week ago, investors added $11.56 billion to stock mutual funds, according to TrimTabs.com, an investment research firm. And last week, Janus closed three of its top mutual funds to new investors, saying so much cash was coming in that managers couldn't invest it the way they wanted.
One thing that has calmed, at least somewhat, is the expectation for sky-high returns. Overall, investors in the April poll by PaineWebber and Gallup said they expect returns of 13.9 percent in the coming year, compared with expectations of 15.3 percent in March. But when given a 10-year horizon, investors' expectations of returns went up--increasing to 16.6 percent from 16.2 percent in March.
The poll found a marked difference in expectations based on the age and experience of the investor.
Younger investors were most affected by the market turmoil. Their expectations for returns over the long term dropped from 20.4 percent in March to 18.4 percent in April. Among the least-experienced investors, expectations fell from 21.9 percent to 20 percent, according to the survey.
But the firm's own calculations for returns are much lower. "PaineWebber tells investors to expect historical returns in the 10 to 11 percent range," a spokesman for the brokerage firm said. And some analysts believe the market may deliver returns below that historical average.
It is not just individual investors who are bullish on the market. Many Wall Street professionals are still optimistic. In a Merrill Lynch & Co. survey called the "sell-side indicator," market analysts are asked about their suggested allocation of stocks, bonds and cash. The survey has found that when the allocation of stocks is above a certain level, it is actually a bearish indicator for the market, according to Merrill Lynch strategist Richard Bernstein.
"It's the first time in the survey that in response to increased volatility, analysts got more bullish," Bernstein said, adding that the results of the survey were the third most bearish in its 15-year history.
Johnson of First Albany agreed with the contrarian view. "In markets, you look for the emotional extremes," he said. "If there's too much optimism, it's time to sell. If there's too much pessimism, it's time to buy."
Another element of investors' optimism is the idea that they no longer fear a bear market because they believe the Fed will not let one happen, according to many Wall Street watchers.
"They think the Fed will save the day," Bernstein said. "The Fed doesn't respond to the market, it responds to economic growth. . . . They also think Nasdaq is immune to higher interest rates. How could they be so dumb?" he asked, noting that in the new economy, high-tech companies are the ones that will most need financing to fuel their growth.
Respondents to the PaineWebber-Gallup survey were asked whether they thought significant increases in interest rates by the Fed over the next few months would have a major impact, minor impact or no impact on the economy. Fifty-nine percent of those polled said it would have a minor impact, and 10 percent said virtually no impact.
SIA economist Fernandez disagrees with that assessment of the impact of the Fed's actions. "At the end of the day, Greenspan is going to drive a semi sideways through the economy," he said.
Investor Mannino thinks the market has already responded to the predictions that the Fed will continue to raise rates, with the next bump coming on Tuesday, when the Fed's Open Market Committee meets.
"Over the last year or two, we've become so used to reading the Fed that before it happens it's already figured into the market," Mannino said. "I just don't think it's the big deal it used to be."
But his optimism is tinged with some caution.
"Even if the market goes to hell in a handbasket, some companies will still thrive," he said. "You just have to be careful about what you invest in."
¸ 2000 The Washington Post Company |
