Even a Bull Market Can Be Nerve-Racking
What does the 3,000 Dow mean for you? Good news followed by better.
The Dow Jones industrials hitting a new peak last week only confirmed what other stock indexes have been saying: that the bull market remains strong. The Wilshire index of 5,000 stocks has risen 27% since January; significantly, indicating a new investment trend, the NASDAQ index of stocks traded over the counter has gone up sharply, and the Russell index of small company stocks is up almost 30%--where last year the small-stock indicator was down 20%.
And even though the Dow average closed out the week under 3,000, its strength confirms an even more important trend. The overall rise in U.S. stock prices will probably continue, say technical analysts at Fidelity Investments, the Boston-based mutual fund group. They see pension funds moving a higher percentage of their vast investments into U.S. equities.
Furthermore, the pension funds will be adding new money to the market. “Pension funds will have to invest $100 billion to $200 billion in new resources every year throughout the 1990s,” writes Peter F. Drucker, the management scholar and pension fund expert, in the Harvard Business Review.
Those retirement funds, which already total $2.5 trillion and own almost 40% of the stock in the country’s big and mid-sized companies, are spreading out. Their legions of professional money managers and advisers are searching for value among smaller companies.
And new players and investors are further expanding the pension universe. Employee savings plans--401(k) plans and others--are growing, their assets professionally managed by mutual fund companies--Fidelity, Vanguard, T. Rowe Price, Dreyfus and others. The mutual funds now have $280 billion in stocks, an amount that is sure to grow.
So two trends are clear: more money in stocks and more professional managers for the money.
Great, you think. To make money in stocks, all you have to do is find out what the big money is buying and do the same. But life isn’t so easy. You should be aware of how the investing game has changed and why investing in individual stocks should be done with the candy money, not the milk money--the extra available funds, not the core nest egg for retirement or a college education.
Volatility--the range and speed of a stock’s price movements--has increased dramatically. And that has made buying and holding good stocks more nerve-racking. Take “the Generals,” as they’re called, the stocks of General Electric, General Mills, General Motors. A decade ago those stocks might fluctuate 20% in a year.
But last year, General Mills moved 67%, GE 50% and GM 53%. General Mills is Wheaties and Betty Crocker. The cereals and cake mixes didn’t change, but the ownership did: 63% of General Mills is owned by institutional investors, and last year 50% of its stock changed hands.
All movement isn’t upward. IBM recently fell 16% in a couple of days on a poor earnings report. Apple Computer has gone from $24 a share to $73 in the past year but fell nearly $10 in one day last week on an earnings report that the market didn’t like.
And smaller company stocks move wildly. Seagate Technology, the largest maker of computer disk drives, fell 25% in one trading session last week on lower earnings for a single quarter.
Such movements reduce your defenses. You can put stop-loss orders in with your broker, to sell out if the price falls sharply. But prices now move so quickly that you might be sold out of a stock you wish to hold, only to watch the price rebound the next day. It used to be said that a rising tide lifts all boats. Now the tide tosses all boats.
Why the volatility? The same forces that make the market go up--the pension funds--also make it volatile. Pension fund money managers, advisers, consultants, etc.--an industry that brings in at least $15 billion a year in fees--trade a lot.
On the other hand, sometimes they don’t trade. Often a pension fund’s holdings in a company are so large--5% or more of the outstanding shares--that it cannot easily trade them. The upshot is that there might not be that much stock available. So a relatively small amount of trading can cause dramatic price movements.
Even the big guys have trouble. David Dreman, head of Dreman Value Management, which manages $4 billion in institutional money, had to pay a premium last August to buy Barnett Banks’ stock because shares weren’t available in the amounts he needed. It was a revealing moment: Short-sellers in Barnett and other banks had “borrowed” or tied up access to a lot of stock. Dreman was going against the crowd, buying bank stocks with both hands--First Fidelity, PNC Financial, BankAmerica, First Chicago, Barnett and others. He was right and the shorts were wrong--today many of his bank stocks have doubled in price.
What’s all that mean to you? In a market increasingly dominated by professional investors, you should consider professional management of your own--either through mutual funds or, if you’re wealthy, one of the new flat-rate institutional management accounts for individuals. PaineWebber, for example, will assign you an individual money manager and charge a flat 2.8% of your portfolio’s value per year if your account is $100,000 or higher. Whether that’s a bargain, of course, depends on how much money the institutional manager can make for you.
For most investors, there is an enormous number and diversity of mutual funds. Right now, all the rage is investing in small growth and technology companies. But Kenneth Fisher of Fisher Investments, Woodside, Calif., predicts that the growth investors’ enthusiasm will cool later this year as small companies inevitably fall short of outsized expectations. That will be the time, Fisher says, to look for small companies with value--or to get somebody to do it for you.
Finally, the most obvious meaning of the 3,000 Dow should not be forgotten: If you’re one of more than 50 million employees covered by a pension plan, the rising market is making your pension fund wealthier. Good news.
