Postwar Lessons on Wall Street
Wall Street’s devastating bear market of 1990-91 began one year ago today, when Saddam Hussein’s Iraqi hordes overran Kuwait.
But it’s tough finding battle scars on the average stock. Despite the recession and corporate earnings plunge precipitated by the Kuwait crisis, the Standard & Poor’s index of 500 major stocks today is 8.9% above its level of Aug. 1, 1990.
A barrel of oil--the investment most people expected would be sharply higher one year later--goes for $21.27, off 1.3% from the pre-invasion price.
As stocks have rebounded to near-record levels this year, the argument continues to rage over how high they deserve to be, given a shaky economic outlook. Nonetheless, many investors have been forced to rethink their strategies of the past year, given the U.S. market’s ability to emerge so remarkably unscathed within 12 months of such a major global crisis.
“What investors have learned from the past year is that they haven’t really learned anything,” says Len Hefter, manager of small-stock trading at brokerage Jefferies & Co. in Dallas. Long-held assumptions about how stocks should react to economic and political events have been proved wrong, he notes.
More important, many investors who believed that they understood how to trade the market’s twists and turns have been saddled with huge losses--while many buy-and-hold investors have made money by sticking to their discipline and keeping their emotions in check.
One year later, Wall Street is coming to grips with three important lessons from what was the first prolonged bear market since 1982:
* Thoughtful investing still beats speculation or trading on fear. Chances are, any investor who bought stocks the day before the Iraqi invasion felt like a fool a day later. Few people could have been persuaded to think a year ahead at that point.
The Dow Jones industrial average tumbled 34.66 points on Aug. 2, 1990, to 2,864.60, as word of Iraq’s move shook the world. Between Aug. 3 and Aug. 7, the Dow plunged a total of 153.96 points. The bear market was on, and it wouldn’t end until Oct. 11, when the Dow bottomed at 2,365.10--a drop of 21% from its July, 1990, peak of 2,999.75.
Investors who were smart enough to sell early in the decline and buy again near the low have reaped huge gains, of course. But even the savviest of traders expected the market to drop much more than 2,365 on the Dow. When stocks began to rise in November and December, most traders refused to believe that the move was real, because fear still overruled the positive outlook that many companies continued to express.
For example, there was no good reason to sell Thousand Oaks-based biotech firm Amgen Inc. while the Kuwait crisis raged, because demand for the company’s drugs was totally unaffected by the war or the economic recession. An investor who bought the shares a day before Kuwait was invaded now has a gain of 229%, despite the stock’s ups and downs during the past 12 months.
A lucky trader could have done better, but the fact remains that “investors who attempt to time the market’s moves often end up being out at the wrong times,” says John Kryzanowski, manager of brokerage Alex. Brown & Sons Inc. in Los Angeles.
Likewise, traders who speculated that earnings of industrial giants such as General Motors might rebound with the economy’s recovery this year have been beaten handily by investors who have stayed with stocks that have delivered earnings growth, such as drug, food and up-and-coming companies such as computer firm AST Research. “If you stuck to your knitting on growth companies, you’ve done well,” says money manager Gordon Fines at IDS mutual funds in Minneapolis.
* Markets no longer move in sync. Throughout the 1980s’ bull market, investors saw world markets move higher together, year after year.
But on the anniversary of the Kuwait crisis, the Japanese and German stock markets remain sharply lower, despite strong gains in U.S., British and Hong Kong stocks, among others.
In Japan, investors are still dealing with the end of the 1980s’ wild speculation that sent stocks, real estate and other assets sky-high. Germany, meanwhile, is feeling economic pain and dislocation as it absorbs the former East Germany.
The foreign markets’ divergence, like the divergence of industrial stocks and consumer stocks in the U.S. market, is a strong reminder that an old Wall Street maxim is relevant once more, Kryzanowski says: “It’s a market of stocks again, not a stock market.” Investors can’t count on corporate takeovers or asset-speculation to push all stocks higher, as occurred in the 1980s. Buying the right stocks in the right markets is the only formula that will work in the 1990s, and that entails a lot of research and discipline.
* Don’t be afraid to pay for high quality. In a market that has placed a big premium on being right, the companies that continue to post rising sales and earnings are the stocks that investors have wanted to own.
The problem for many people is the fear of paying too much for those leaders. But Norman Yu, a Newport Beach-based money manager who correctly called the market’s turn last fall, argues that investors too often shortchange the potential in the stocks that have proved themselves time after time.
He still favors such stocks as Federal National Mortgage, retailer Home Depot and medical-products firm U.S. Surgical--despite huge gains during the past year--because the companies continue to post healthy earnings increases.
“Their momentum is still there because their earnings growth is still there,” he says.
Yu is also convinced that Wall Streeters who make a bearish case now--based on worry about an at-best weak economic recovery--are missing the boat. Just as many stocks ignored the recession during the past year because their own businesses were strong, many will also perform far better than the rest of the market in a weak economy, he says.
The key, Yu argues, is that the steep slide in short-term interest rates has set the stage for increasing stock ownership by individuals. Fed up with low rates on money funds and bank CDs, and less excited by bond yields of 8% to 9%, many individuals will continue to move into stocks, Yu says. And they will want to buy the stocks that have been the leaders all along, he says.
What about the huge federal debt, corporate layoffs, Soviet unrest and the host of other worries dogging the market? “Most people still are skeptical about stocks,” Yu admits. “But people tend to react to the obvious. Sometimes you have to go completely opposite of the obvious.”
One Year After Saddam: Markets Are Out, Stocks Are In The Iraqi invasion of Kuwait one year ago today precipitated the worst recession and prolonged bear market since 1982. Twelve months of crises have taught investors some key differences to expect in the 1990s versus the 1980s: World Markets Diverge . . . Investors who’ve tried to pick “markets” have been whipsawed by wild divergences around the globe. How key world stock market indexes have changed since Aug. 1, 1990: Hong Kong/Hang Seng: +16.2% U.S./NASDAQ (small stocks): +15.7% Britain/FTSE: +10.8% U.S./Dow industrials: +4.1% Germany/DAX: -14.3% Japan/Nikkei: -21.9% . . . And So Do Individual Stocks Despite the recession and bear market, Wall Street has rewarded astute stock-picking--but the game is far more difficult than it was in the 1980s, some experts say.
12-month Stock Aug. 1, 1990 Now change Amgen $44 3/8 $146 1/4 +229.6% AST Research 10 5/8 26 1/4 +147.1% Home Depot 24 1/4 48 +97.9% Lockheed 27 3/8 46 +68.0% Coca-Cola 45 3/8 60 7/8 +34.2% Fluor 44 7/8 45 5/8 +1.7% General Motors 45 3/8 39 5/8 -12.7% Unocal 31 1/8 25 3/8 -18.5% Security Pacific 30 5/8 24 -21.6% Western Digital 12 1/8 3 3/8 -72.2%
Lower Rates Fuel Optimism Short-term interest rates have fallen sharply over the past year as the recession has slowed credit demand. Stocks have been a magnet for cash as investors have become increasingly frustrated with low yields on money funds and bank CDs. But long-term interest rates still haven’t fallen much.
