Wall St.’s Bulls: Why the Angst?
What if Wall Street gave a party and everybody showed up--but almost nobody had any fun?
As the great stock bull market of the 1990s plows onward, the tens of millions of American shareholders are richer by a collective $1.6 trillion in the past year alone. Yet their mood seems to move inversely with their ballooning portfolios.
Instead of excitement, hoopla and the smugness that comes with being “in the know” about stocks--all hallmarks of previous American bull markets--investors’ emotions run more to guilt, anxiety, apathy and even mild disappointment.
Listen to Jan Chatten-Brown, a 49-year-old Los Angeles attorney who has been investing in stock mutual funds for 10 years.
She’s glad to be making money, of course. But she worries that “stocks seem to do best when [firms] are laying people off. Since we’re all in this economy together, I find that a bit unnerving.”
Among professional money managers, the past 13 months have been a continual and mostly losing battle to keep up with the Dow Jones industrial average, which soared 33.5% last year and is up an additional 8.5% this year.
Many fund managers “don’t understand what’s going on” with the economy or the market, says Alfred Kugel, strategist at the investment firm Stein, Roe & Farnham in Chicago. “That’s why it’s not fun.”
And then there are new investors such as Elise McMullin. The 25-year-old Washington paralegal plans to join an investment club with a dozen friends. They each will pool at least $20 a month to buy stocks they will research themselves.
“I think that for many people the stock market is such a mystical and confusing thing, and it is for me too,” she soberly admits. Then why bother? “I really don’t believe Social Security is going to be any kind of security for my future.”
That a bull market so spectacular in magnitude should be greeted with so much angst and apprehension, and generate so little overt excitement, marks a strange chapter in the American economy and sets this powerful move in stocks apart from surges in the mid-1980s, the 1950s and ‘60s, and the 1920s.
Certainly it feels better to be richer than not, a fact that the record number of American shareholders would be unlikely to dispute. But many analysts say the unprecedented circumstances from which this bull market has arisen go a long way toward explaining its inability to stir significant passion on Wall Street or Main Street.
It can be argued that stocks in the 1990s are rocketing for all the wrong reasons: Strong corporate profits achieved at the expense of workers’ job security; falling interest rates that reflect an anemic economy, and, most important, a record and rising level of investment by aging Americans who own stocks not necessarily because they want to, but because they feel as if they have no choice--with retirement approaching and stocks universally touted as the only true path to financial security.
Even as recently as the 1980s bull market, many investors were still confident about their job and reasonably certain that their home’s value would appreciate substantially over time. Those hopes have since faded for millions of Americans.
“People are being forced to be speculators” in stocks, contends Ricky Harrington, a veteran market analyst at the brokerage Interstate/Johnson Lane in Charlotte, N.C. “They really do not know what they’re doing.”
Mutual Funds
There are, of course, many Wall Street professionals--and individual investors--who beg to differ.
“I like owning a piece of the economy,” says 54-year-old Angela Jackson, a member of the Pacific Mermaids Syndicate investment club in Oxnard.
Since November 1994, the club’s 15 members have been pooling their money--$50 a month each--to buy such stocks as McDonald’s Corp. and drug maker Merck & Co. Jackson and her husband, Ron, a self-employed attorney, have no corporate pension fund to count on, so she admits that investing has become a necessity, not a luxury.
Even so, she says: “I really have faith in the companies I own. And I like checking on them.”
That direct connection between investor and corporation was the norm in past bull markets, and accounted for much of the emotion and excitement that characterized those markets.
“We got a lot of fun out of buying stocks in the 1960s and ‘70s,” says Stein Roe’s Kugel.
Individual issues such as Xerox, Eastman Kodak and International Business Machines dominated cocktail-party chatter in the late 1960s, reflecting a heady time of tremendous optimism about the U.S. economy. Americans were going to the moon, and so, it seemed, was the stock market: From June 1962 to November 1968 the Dow index rose from 536 to 985.
“People used to sit in brokerage offices, watching stocks” on the electronic ticker-tape that was standard in many such offices then, Kugel recalls. Today, “you hardly see chairs in brokerage” lobbies, he says, only half-joking. “They don’t want people sitting around.”
More to the point, the ticker is irrelevant to most people, because that isn’t how they invest today. Instead, mutual funds--which allow small investors to pool their money in a diversified portfolio of stocks under the stewardship of a professional manager--have become the principal vehicle of stock ownership for individuals.
In 1995, gross purchases of stock mutual funds totaled a record $310 billion, up more than 300% just since 1990, when purchases were $71 billion, according to the Investment Company Institute, the funds’ chief trade group.
There are more than 2,200 stock funds today holding assets of more than $1.2 trillion, up from 288 funds holding a $44 billion in 1980. The financial empires that have been built on the funds--Fidelity Investments, Vanguard Group, Templeton Funds--are franchises whose names now are as familiar as Coca-Cola and Gillette.
The public’s shift away from individual stocks and into the funds perhaps is best illustrated by the transactions handled by San Francisco-based Charles Schwab & Co., the nation’s biggest discount stock brokerage and a favorite firm of many do-it-yourself investors.
In 1995, as the stock market rocketed, Schwab customers were net sellers of individual stocks in all but three months. Net selling means the dollar amount of stocks sold through Schwab was greater than the dollar amount purchased. For the full year, customers liquidated a net$3.6 billion in individual shares.
By contrast, customers were net buyers of mutual funds in all but one month last year, and for the year they bought a net $7.9 billion.
In January 1996, Schwab’s net purchases of mutual funds totaled $1.9 billion, mirroring the record level of cash pumped into stock funds nationwide that month, which in turn has helped power the market’s latest surge.
Inattentive Investors
The public’s rationale for choosing mutual funds over individual securities is easy to understand. For convenience and diversification the fund concept is hard to beat, especially for people with relatively small sums to invest.
But the ascendance of the funds also explains why many investors who are directly responsible for stocks’ bull market feel no strong linkage to it--unlike in previous bull markets when pride in knowing about individual stocks, or at least pretending to know, was an integral part of investing.
With mutual funds, “There’s no sense of ownership” of real companies, contends Ken Janke, head of the Royal Oak, Mich.-based National Assn. of Investors Corp., an umbrella organization for investment clubs nationwide.
What’s more, for the past decade Americans have been conditioned by the media and by an army of financial advisors to be “buy-and-hold” stock fund investors. Trying to accurately time the market’s ups and downs is far too difficult for the average person, experts insist.
That has fostered a sense that fund investors needn’t pay close attention to the market; everything will work out in the long run, people are assured, because the stock market always goes up over time.
The high degree of trust in that promise is most apparent in the avalanche of cash entering mutual funds each month through 401k savings plans and other such retirement accounts.
Fidelity Investments, the nation’s largest mutual fund operator and one of the biggest stock investors, estimates that 70% of its monthly cash intake is through retirement plans.
Because that money is automatic and restricted--investors aren’t supposed to count on touching it until old age--there is even less reason for people to get caught up in the emotion of a hot bull market, or to care whether the Dow industrial average, now 5,551, is 2,000 points higher or lower in the short term.
“This money isn’t thought of as something to spend,” says Susan Sterne, economist at Economic Analysis Associates in Greenwich, Conn.
Indeed, many financial planners say they often find that new clients can’t name which stock funds, exactly, they are investing in via 401k plans--as if it didn’t matter.
Emotionless Market
But if this is history’s first largely emotionless bull market, the reason may be less the style of investment people have chosen than what has motivated them to invest in the first place.
Lacking job security and constantly reminded about the tottering state of Social Security and Medicare, many Americans--especially the 76-million-member baby boom generation--believe that investing “is not discretionary--it’s now necessary,” says Sterne.
That shift has been exacerbated by corporations’ move away from defined-benefit pension plans, where the company promises a certain level of retirement benefits, to defined-contribution plans (such as 401ks), where the company puts the onus on the employee.
“I don’t think it’s fun for anyone to add things up and say, ‘I need this much money to retire, and I can’t depend on Social Security,’ ” Sterne says.
In fact, a 1995 survey of 1,000 adults by mutual fund company Putnam Investments found that 55% “get very discouraged” when they see estimates of the savings they’ll need in retirement.
Moreover, with interest rates near 20- or 30-year lows and home values rising slowly, if at all, in many areas, the stock market more than ever is considered the only logical route to building a decent nest egg.
“I think people don’t see any alternative to stocks,” says Bradlee Perry, a Wall Street veteran and chairman of the Babson Group of mutual funds in Boston. That was not true in any other bull market this century, he adds.
Thus, buying stocks has become a survival issue at worst, and at best simply a necessary routine, like buying food or gasoline, Sterne says. “And people don’t get excited about buying food or gasoline.”
Even those investors lucky enough to have job security may have a tough time reconciling the good news of soaring share prices with the widespread sense of gloom about job prospects generally, as companies continue to slim down--or merge--in the name of remaining globally competitive.
While investors have been enriched by the bull market, “this is not a feel-good story at home,” says William Dodge, investment strategist at brokerage Dean Witter Reynolds in New York. “People still see layoffs, they still know somebody laid off. It has turned into ‘Thank God I have a job.’ People become very suspicious of the economy, and the stock market, because of that.”
And despite the growing ranks of mutual fund shareholders, now an estimated 38 million people (representing one-third of U.S. households), economists say that weak wage growth means a huge number of Americans don’t have the wherewithal to save anywhere near what they should, in stocks or other assets.
Can It Last?
If this bull market hasn’t been a wellspring of happiness, does that mean it can’t go on?
On the contrary. Some of Wall Street’s biggest optimists say that it is precisely because aging baby boomers feel chained to stocks--and are investing without even thinking much about it--that this bull market will enjoy surprising longevity.
The aging of the post-World War II generation in the developed world will automatically fuel more saving and investment while slowing consumption growth, trends that should keep inflation and interest rates low, experts note.
At the same time, the great control that American companies now enjoy over labor costs--at the expense of workers’ paychecks--also gives them greater control over profitability. And rising corporate profits provide the underpinning for stock prices over time.
Suresh Bhirud, a Stamford, Conn.-based investment strategist and a longtime bull, believes that the confluence of positive factors that has spawned the 1990s bull market is unlikely to dissipate soon.
Although the market is bound to suffer periodic pullbacks, he sees the Dow index possibly reaching 7,700 in two years, and 10,000 before the turn of the century as investors continue to pile in, even if reluctantly.
Chatten-Brown, who is about to enter her 50s, remembers thinking much more about the fun of investing when she was younger. Now, with two sons nearing college age and her own retirement to consider, she says, “This is more serious than fun.”
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Bull Markets
The current bull market is so far the third strongest of the post-World War II era as measured by the gain in the Standard & Poor’s index of 500 blue-chip stocks. But it is the second-longest in duration.
Bull market: Price change of S&P; 500
June, 1949 to Aug. 1956: +267%
Oct. 1957 to Aug. 1959: +56%
June, 1962 to Feb. 1966: +80%
Oct. 1966 to Nov. 1968: +48%
May 1970 to Jan. 1973: +74%
Oct. 1974 to Sept. 1976: +73%
March 1978 to Nov. 1980: +62%
Aug. 1982 to Aug. 1987: +229%
Dec. 1987 to July 1990: +65%
Oct. 1990 to present: +121%
Source: The Carmack Group
