Technology, Media Help Spawn a Nation of Investors
The ritual starts at 6 each morning: Merle Rutenberg of Santa Monica reaches for the television, watching avidly as Wall Street’s daily drama unfolds, witnessing her personal wealth careen upward, joining in what has become an extraordinary national pastime.
Does a crushing correction beckon? “I don’t see history repeating itself,” says the 46-year-old former garment industry employee, discounting chances of a crash. “I think history’s changed.”
Halfway across the country, at an investment firm in Minneapolis, Ronald R. Reuss offers a darker view of what awaits the many who envision a future of ever-rising wealth. “I’m really worried about it,” says the veteran economist at Piper Jaffray Cos. “At some point these people are going to get trashed.”
Aided by technology, lured by media and compelled by sobering arithmetic, the United States has become a nation of investors.
More than ever, it is the middle class and not just a financial elite that is correlating retirement dreams with the Dow Jones industrial average, scouring the Internet for tips, executing trades online and dipping into profit for such short-term rewards as cars and vacations.
As the once-formidable barrier between Wall Street and Main Street has shattered, long-held understanding of how America’s economic machine is supposed to work is in tatters as well, confounding policymakers and forecasters, imposing new pressures on political leaders and presenting risks for an entire economy that is tethered to turbulent financial markets as never before.
The transformation has greatly complicated interest rate policy and altered consumer confidence in just the last few months, as behavior and psychology have become increasingly dependent on assets in the stock market.
“There is a striking--and potentially ominous--new wealth dependency of the U.S. economy,” maintains Stephen S. Roach, chief economist at investment firm Morgan Stanley Dean Witter in New York. “While a rising tide has lifted more boats than ever before, when the tide goes down we could be more vulnerable than we ever dreamed.”
With the tide rising rapidly for more than a decade, stock assets account for a larger share of household wealth than ever before: 24.2% in mid-1998, according to the latest Federal Reserve data. But in a day when technology and media have transformed investing into a recreation for the masses, even that may drastically understate the market’s growing reach.
Many experts believe that half or substantially more of all households now hold stock. (The last authoritative figure was 41% in 1995.)
The democratic byways of cyberspace are one of the reasons. Just a few years ago, the notion of stock trading over the Internet was little more than a high-tech fantasy. Today, Americans have 5.3 million active online accounts, representing 25% of all trades by individual investors, according to Forrester Research, a technology research firm in Cambridge, Mass. And the number is still soaring.
“It’s a fundamental lifestyle change,” says Lisa Nash, a spokeswoman for E-Trade Group Inc., an online investment firm based in Palo Alto. “It’s about consumers--individuals--taking control of their lives.”
Television has added to the explosion of free information that not long ago was hard to come by.
On the nerve-racking afternoon of Oct. 27, 1997, as stock markets were collapsing around the world, more than 1 million U.S. households tuned in to CNBC, the first time its daytime audience crossed that threshold. Increasingly, such once-esoteric matters as Brazilian fiscal policy, Japanese bank reform and German interest rates have become news for the masses.
Taken together, the new financial media are revolutionizing the experience of investing, maintains Bill Bolster, president of CNBC. Moreover, this bounty of inexpensive, in-your-face information has appeared at a time when an aging public is increasingly conscious of its long-term economic security.
“I can anonymously get information from somebody that’s not trying to sell me something--on CNBC--and execute [the purchase] very cheaply on the Internet,” Bolster explains. “Everybody is getting the information at about the same time. It’s leveled the playing field.”
Perhaps no development symbolizes today’s mass participation on Wall Street--and Wall Street’s grip on the broader economy--better than the emergence of 401(k) accounts, a type of retirement savings vehicle that did not even exist until the 1980s.
More than 25 million workers have $1 trillion invested in their 401(k)s--typically pretax income matched by employer contributions--according to Spectrem Group, a research and consulting firm in San Francisco.
“That really is quite new,” said Meir Statman, a finance professor at Santa Clara University. “People who care what the Dow did today, that now is a major class--and a pretty content one.”
Just as the popularity of 401(k) accounts has skyrocketed, so has the prevalence of mutual funds, which are made up of many individual investments and need not be used for retirement.
In 1980, only 6% of U.S. households had such accounts for stocks or bonds, according to the Investment Company Institute, an industry group in Washington. By last year, the share had leaped to 37%, with a colossal pool of capital approaching $5 trillion.
To its many enthusiasts, the growing nation of investors is a positive and historic development, already paying off in higher living standards for households, young and old. While others may predict a market crash, gung-ho participants often express their intention to ride out the downturns.
Merle Rutenberg backs up her optimism with a widely shared view that the huge baby boom generation has little choice but to plow whatever savings it has into Wall Street and keep it there, because stocks historically have outperformed other investments. Indeed, going back two centuries, stock investors have enjoyed returns of 7% even after adjusting for inflation, according to Jeremy J. Siegel, an economist at the University of Pennsylvania’s Wharton School. (Returns in the 1990s have been a barely imaginable 18%.)
“They’ve got nowhere else to go with their money,” Rutenberg says. Moreover, she tries to hold on to her investments rather than sell them when they fall. “I must admit that sometimes I do panic and I sell a little. You have to have a stomach for this.”
More broadly, some argue that a society of shareholder-voters benefits in many ways. Companies can raise capital more easily to expand and adopt new technology. Entrepreneurs have an easier time luring financial backers. Workers become mini-capitalists sharing in the rewards of profitable companies.
“Our standard of living is higher,” Statman maintains. “It increases our stake in the economy. We are not just employees but owners of chunks of companies. These are all good things.”
But the nature of today’s investors means that the market is having a greater effect on the economy than ever, with a potentially ominous downside.
During the 1990s boom, people have become less inclined to save money outside the stock market than they used to, and more likely to base big spending decisions on year-to-date returns rather than weekly paychecks. And this has created a new dilemma for forecasters.
“In the past, it was easier to know when consumers were going to run out of steam,” says Donald Ratajczak, director of economic forecasting at Georgia State University. “Quite frankly, now we don’t know when they’ll run out of steam--and that’s a little scary. We can’t make a clear read on when the next downturn will occur.”
Ratajczak pegs the extra consumer spending that cannot be explained by historic behavior in the range of $150 billion to $160 billion this year, enough money to create more than 350,000 jobs.
In a more wealth-driven economy, he says, “you get stronger [consumer] upsurges, lasting longer, but you get a much steeper decline when it does occur.”
To be sure, many investors insist that they are focused on traditional long-term concerns--college for the kids and retirement for themselves--rather than instant gratification.
“I don’t think we’ve said, ‘Oh, gee, we made $10,000 in the last month, so let’s buy a new car,’ ” says Karen Gold, a certified public accountant in the San Fernando Valley. She describes herself as “a long-term investor” who, with her husband, adds monthly to their stock holdings.
But, she adds, “maybe, subconsciously it’s affected us. Maybe we just in general feel good. Oh, things are going well, so we can afford this vacation.”
There is no question, however, that many households are tempted to skim. As one example, 15% of 401(k) holders have at least one loan outstanding on their retirement account, according to Jeffrey S. Close, marketing director for Spectrem.
In such a climate, economic policy is more of a guessing game than ever. After all, if it is harder to know when consumers will finally slow down on purchasing, and income trends are less closely tied to spending decisions, what is the appropriate level for interest rates? If consumers are much more ebullient than traditional gauges suggest they should be, the Fed could set rates too low and spark inflation.
The stampeding stock market also complicated a Fed bid to stave off a worldwide credit squeeze earlier this fall. Shellshocked lenders sought the tonic of cheaper money in the form of lower interest rates, prompting the Fed to accommodate them, but stock investors responded with euphoria.
Fed Chairman Alan Greenspan “had to lower interest rates to save the world” but in the process “re-created the bubble that he desperately wished to end nearly 3,000 Dow points ago,” says Roach of Morgan Stanley.
Gisele Lowy of Irvine is among those who have caught the market’s latest wave. Just a few months ago an ad in the Wall Street Journal by investment firm Charles Schwab caught her eye. Today she talks like a seasoned veteran, spending more than two hours a day perusing Web sites, reading analysts’ reports and following business news.
“You could go to the Ticketmaster [Online CitySearch] Web site last week--before it went into its first public offering,” she notes with enthusiasm.
Lowy, a former insurance risk manager, had high hopes one day last week when she plunked down $4,700 on UBid, a new Internet stock. She had instructed her broker to sell when share prices hit $60, a level that would have meant a profit of more than $2,500.
The plan was working perfectly, but when the shares hit $58 they reversed course, and late last week had settled down in the low 30s, with Lowy out about $600.
“I’m still very hopeful,” Lowy, 46, says with a laugh of her future in America’s newest public sport. “I think it’s going to turn. I may be rich yet.”
