Article 23 of 200
Financial
Where No Investor Has Gone Before; Amateurs Steered the Ship
Through a Spacey Year
Ianthe Jeanne Dugan
01/03/99
The Washington Post
FINAL
Page H01
Copyright 1999, The Washington Post Co. All Rights Reserved
Johnny Whitehurst, an Alabama minister, has every reason to call the stock
market "a saving grace." He bought shares of America Online Inc. before it
was wildly fashionable and sold after the price quadrupled.
With the transaction, Whitehurst got the money he needed to expand his
medical equipment business.
And with it, he became even more of a market booster. "I'm trying to
encourage everybody I know to get involved," he said. "This year is going to
be one of the best years ever. . . . We're going to have a bull market."
Such unabashed ebullience among individual investors helped make the
market's behavior so bizarre last year that economists were driven to
outer-space images to explain it. The stock market soared to new high after
new high before diving for a few brutal weeks into what some describe as
the shortest bear market in history, then surged back on a wave of
mega-mergers.
"It was the 'Star Trek' market," said Peter Navarro, a professor of public
policy at the University of California. "It went places it has never gone
before."
The uncharted route was led by the growing brigade of do-it-yourself
investors -- like Whitehurst -- who intrepidly pushed ahead in the face of
their first test in volatility, blissfully ignoring the predictions of skeptical
commentators who assumed the amateurs would cut and run at the first sign
of trouble.
They hung on to mutual funds, sank money into stocks and made penniless
Internet companies the new darlings of Wall Street through the turmoil in
Asia, the collapse of the ruble, the impeachment of the president and a small
war.
"This year we completed the transition from institutions to individual
investors," said Laszlo Birinyi, a research consultant and money manager in
Greenwich, Conn.
Consider activity on the New York Stock Exchange: This year, Birinyi said,
$63 billion of net buying was in blocks of $10,000 or less. In comparison,
$44.7 billion was in "big-block" trades. "It's the people standing in Charles
Schwab who are running the show," he said.
Indeed, Charles Schwab & Co. is another telling barometer of the individual
muscle. In just two years, it added 1.4 million new accounts, for a total of
5.4 million now.
Even more indicative of the trend are the numbers of people flooding into
online accounts. E-Schwab, the biggest online trader in the country, doubled
its accounts in two years and now handles more than half of all of Schwab's
business. E-Schwab assets have quadrupled in that time to $156 billion.
The online business, many professionals say, is the source of massive "day
trading" in which investors ride stocks to their daily peaks, sell them and
bottom-fish for new ones. The activity has contributed to the stock market's
extreme unpredictability.
"The scary thing about this market is the crazy speculation going on," said
Richard Steinberg, a Boston-based money manager. "It reminds me of the
end of 1972, when everybody was focused on a few large-cap funds.
Everybody got bullish -- and over the next two years, the market dove 50
percent."
Individuals now hold more than half of all stocks, according to the Federal
Reserve, and another 20 percent in mutual funds. "The individual has the
gold," Birinyi said. "This is a source of great frustration to commentators,
analysts and journalists. They're talking to other commentators, analysts and
journalists instead of the guys standing at Charles Schwab."
The most confounding conversations are about Internet stocks, which have
defied valuations and historical models in their vertiginous climb.
Whitehurst, for example, has found most of his profits in AOL, Yahoo Inc.
and other high-tech stocks.
Wilshire Associates Inc. tracks 5000 public companies comprising some $12
trillion in market capitalization -- virtually the entire stock market. To
determine the strength of Internet stocks, Wilshire ran a separate index
without Internet stocks in a new study. Overall, the index rose 23.4 percent.
Without the high-tech shares, the index climbed only 19.2 percent, meaning
that Internet stocks accounted for nearly 20 percent of the growth of the
stock market this year.
Indeed, the strength showed up in the Nasdaq composite index, whose heavy
tech contingent in recent weeks gave it an unconventional lead over blue
chips. Internet stocks now make up 6 percent of the market -- more than
double the share with which they began the year, Wilshire said.
"The Internet craze is absolutely ridiculous," said David Wyss, chief
economist at DRI/Standard & Poor's. "Instead of P/E ratios, for
price/earnings, you have P/F ratios, for price/fantasy."
Many of the Internet companies buoying the indexes don't even have profits.
Though Amazon .com Inc., for example, has made no money, its market
capitalization has soared to more than $15 billion.
The Internet fever underscores the willingness of individuals to hang in for
the long haul. "The kinds of companies that did well are those without
immediate payoff," said John Rekenthaler, research director at Morningstar
Inc. "People are looking at what stocks can do for them in 2003 or 2008."
Individuals were only temporarily shaken during the summer when, in short
order, Russia defaulted on some of its bonds, Asian problems ate into U.S.
profits and Brazil began sinking economically. "This year it became clear
that there's an ever-growing interconnection with the global economy," said
Jon S. Corzine, co-chief executive of Goldman Sachs & Co. "We're no
longer just subject to the management of our economy, but all the
idiosyncrasies of the international economies."
The interdependence manifested itself in U.S. stocks in late summer. On
Aug. 31, the Dow Jones industrial average plunged 502 points. It swooned up
and down for weeks, losing 1,900 points by Oct. 8. In August, investors also
pulled money out of mutual funds for the first time in eight years, according
to the Investment Company Institute. Through October, $11.7 billion came
out of mutual funds.
The Federal Reserve stepped in to boost confidence with the first of three
interest-rate cuts, an action followed by central banks in Europe and Asia.
Investors then took heart, and the market headed north again.
During the worst of it, only a nickel for every dollar was pulled out of
mutual funds, said Avi Nachnamy of Strategic Research, a Manhattan mutual
fund think tank. "We've seen 20-plus-percent swings in the market," he said.
"Despite that alarming volatility, investors hardly reacted with defensive
redeeming," that is, selling of mutual fund shares.
More than a third of households now have money in mutual funds -- up from
a quarter in 1990 and up from only 6 percent in 1980. "The sentiment was
'Where else am I going to go?' " said Michelle Smith, managing director of
the Mutual Fund Education Alliance.
That fortitude was evident even during the stock market's decline. Investors
sold a net of $7 billion in stocks, Birinyi said. As it regained the 1,900 points
over the ensuing weeks, net buying was $50 billion. "This tells you that the
decline, painful as it was, did not reflect an abandonment of the markets,"
Birinyi said. "What you saw, the buyers became more price-conscious.
Selling was not 'Let's get out of the market and forget we ever heard of
stocks.' "
Many investors began focusing more heavily, though, on names they knew,
increasing a gulf between large and small companies. The Standard & Poor's
index of 500 companies grew more than 24 percent, even before it recently
dropped Woolworth-turned-Venator for America Online. In comparison, the
Russell 2000 index of small companies was down about 8 percent.
The S&P 500's success was largely attributed to about two dozen big
companies, including Cisco Systems Inc., Dell Computer Corp. and Lucent
Technologies Inc., said Bob Torray, a major Bethesda-based money
manager. "That skewed the performance dramatically" and "provided a false
sense that something important was going on," he said. "These are numbers
we've never seen before, but I'm not a believer in a new era."
World economic problems are persisting, Torray pointed out. And huge
lenders have lost money. "If the interpretation of all that becomes more
gloomy, you could see things unwind again," he said.
Ralph Acampora of Prudential Securities Inc. predicts in a new report that
the Dow will meander between a low range of 7800 to 8450 and a high range
of 9800 and 11,500. The year will be erratic as aftershocks of global
economic woes coincide with uncertainty about the effects of potential year
2000 computer problems.
Richard Thaler, a professor of behavioral finance at the University of
Chicago, worries that the individuals driving the market's gravy train are too
optimistic. "They have learned the lesson that markets never go down," he
said. "I think we'll actually get negative returns one of these days. And I
think investors who really think that a bad year is when the market only goes
up 15 percent are in for a rude shock."
Flying Highest
Internet stocks, and to a lesser extent mega-growth ones, fueled much of the
rise in the market last year.
1998 performance (through Dec. 28)
Wilshire 5000 index 23.4%
Wilshire 5000 excluding Internet stocks 19.2%
Wilshire 5000 excluding Internet and mega-growth stocks 17.0%
Wilshire 5000 excluding Internet and mega-growth stocks and the index's
largest 250 stocks --0.4%
SOURCE: Wilshire Associates
Markets 1998: A Snapshot
Technology stocks were hot, while small-caps fell short ...
Percent gain or loss, 1998
Nasdaq composite 39.6%
S&P 500 26.7%
Dow Jones 16.1%
Russell 2000 -- 3.5%
... with Dell Computer and Apple Computer among the star performers --
and Polaroid and Boeing among the big losers.
Best of the Dow
Return, 1998
Wal-Mart Stores 106.1%
IBM 76.6
McDonald's 60.5
United Technologies 49.4
Merck 39.3
General Electric 39.1
Johnson & Johnson 27.3
AT&T 22.7
Exxon 19.5
Eastman Kodak 18.9
Worst of the Dow
Return, 1998
Boeing -- 33.3
Goodyear Tire -- 20.7
3M -- 13.3
DuPont -- 11.7
Disney -- 9.1
Citigroup -- 8.1
J.P. Morgan -- 6.9
Sears Roebuck -- 6.1
Caterpillar -- 5.1
Union Carbide -- 1.0
Best of the S&P 500
Return, 1998
Dell Computer 248.5%
Apple Computer 211.9
EMC Corp. 209.8
Lucent Technologies 175.4
Ascend Comm. 168.4
Cisco Systems 149.7
Providian Financial 149.0
Unisys 148.2
Novell 141.7
Gap 138.1
Worst of the S&P 500
Return, 1998
Harnischfeger -- 71.2%
Ikon Office -- 69.6
Venator Group -- 68.4
Rowan Companies -- 67.2
Case -- 63.9
Union Pacific Resources -- 62.6
Polaroid -- 61.6
Thermo Electron -- 61.5
Baker Hughes -- 59.5
Consolidated Stores -- 54.1
SOURCE: Bloomberg News
washingtonpost.com
Contact: washingtonpost.com
ch,,twp; ph,,TOM ALLEN; ig,,twp CAPTION: "It was the 'Star Trek' market,"
one observer said, and the do-it-yourselfers who it guided it didn't flinch at the
first sign of trouble. CAPTION: "This year we completed the transition from
institutions to individual investors. It's the people standing in Charles Schwab
who are running the show," said consultant and money manager Laszlo Birinyi.
Schwab added 1.4 million accounts in the past two years -- it now handles 5.4
million. |
