What Does It Take to Scare Investors? More Than This

The U.S. dropped bombs on Baghdad, House Speaker-elect Bob Livingston dropped a bomb on Capitol Hill, and a few more big companies, including 3M and Mattel, dropped earnings-related bombs on their shareholders.

But for the most part, Wall Street shook everything off last week. How much it all didn’t matter was reflected somewhat in the Dow Jones industrial average, which rose nearly 1% for the week to close at 8,903.63, and reflected much more in the technology-dominated Nasdaq composite index, which rocketed 2.8% for the week to end at a record 2,086.14.

It would seem that many stock investors, like normal people everywhere in a world where every shocking bit of recorded history now is just a mouse click away, are being forced to raise their indignation thresholds significantly.

Bomb Iraq back to the Stone Age? What, again?

Another political leader is forced to admit adultery? Not even the National Enquirer is terribly interested in this story anymore.

Impeach the president? It’s a sad affair, of course. But what does that have to do with the price we pay for Microsoft shares?

Not much at all, apparently: Microsoft helped lead the Nasdaq market rally on Friday, surging $3.44 to a record $137.81. A year ago you could have had the stock for just $59.

Still, we know from experience a few months ago that Wall Street can get upset enough to start panic-selling instead of panic-buying. But it takes a lot--something on the order of the threatened collapse of the global economy.

This Tuesday, the institution most responsible for halting that threatened collapse, the Federal Reserve, holds its final meeting of 1998. (The Fed evidently is able to hold a board meeting just three days before Christmas because all board members are early holiday shoppers. How efficient!)

After cutting the banking system’s benchmark short-term interest rate three times since Sept. 29, from 5.5% to the current 4.75%, the betting among economists is that the Fed will leave rates unchanged on Tuesday, silently wish the nation a happy holiday, and adjourn until February.

The central bank essentially warned at its last meeting, on Nov. 17, that it was finished easing credit, at least for the near term.

There certainly is no major outcry for lower interest rates on Wall Street today. The despair that permeated global financial markets in late September and early October has largely dissipated.

Asian stock markets have mostly soared in recent months, suggesting that local investors, at least, believe the worst is over for those devastated economies.

Brazil, which in September looked to be the next country to fall in the global domino game of currency devaluations and crashing financial markets, has been bailed out by the International Monetary Fund, although the long-term success of the bailout package is far from assured.

Russia is still a gigantic mess, but it’s such a minor player on the world economic stage that Wall Street has stopped paying attention--except when someone raises the possibility of the country’s nuclear arsenal falling into the wrong hands.

The U.S. economy, meanwhile, is the same old story: The manufacturing sector is hurting because of weaker export demand and a lack of pricing power in general. That’s spelling trouble for earnings growth at more than a few companies.

But overall, confident American consumers continue to spend on the things they love and think they need--keeping the economy on an upward trajectory.

Single-family housing starts, for example, surged 5% in November, and the three-month average of such starts, through November, is the highest in 20 years, Goldman, Sachs & Co. reports.

For the Fed, then, it’s a good time to leave well enough alone. Wall Street, recognizing this, is likely to have the same reaction to the Fed’s probable non-action Tuesday that it had to last week’s news events. Which is to say, stocks will probably rise.

Or at least, that’s the path of least resistance for the relative handful of stocks that have been leading the market for the last month and for much of the last five years.

Apart from the Internet stock mania, the serious buying today is concentrated in just the biggest of the big stocks, and particularly those in the tech sector. Hitting new highs on Friday, besides Microsoft, were computer-networking titan Cisco Systems, up $5.56 to $90.44, and IBM, up $5.50 to $171.56.

How do we know the buying is so concentrated? Consider these stats:

* A Standard & Poor’s index of 600 smaller stocks has gone nowhere since Nov. 6, closing Friday at 166.17, versus 166.98 on Nov. 6.

* By contrast, the Nasdaq 100 index, which tracks the 100 largest Nasdaq stocks by market capitalization (i.e., Microsoft, Cisco, etc.), has soared 19% in the same period.

It’s hardly surprising that investors looking toward the new year would pick technology as a good place to be sinking money right now. If the global economy grows at a better-than-expected pace in 1999, spending on technology should be strong as well.

And if global growth slows, technology--the great business and investment story of this entire decade--may still be a better bet than a lot of other industry sectors.

Even so, many investors’ focus on just the biggest of the big names in tech and other stock groups may betray more underlying worry about the future of the economy, and the market, than the record high of the Nasdaq index would suggest.

A good reason to buy mega-stocks, besides that they are by definition the most successful companies of the moment, is that they are relatively easy to jettison if the economic and market backdrops begin to darken.

But what would it take to make investors believe that the outlook was in fact turning meaningfully negative?

A Gallup survey of 1,001 U.S. investors, commissioned by brokerage PaineWebber and conducted between Nov. 9 and Dec. 7, asked people to rate eight current economic and political problems by their perceived effect on the investment climate.

A total of 51% of respondents believed that the Asian economic crisis was hurting the investment climate “a lot.” But beyond that issue, people were relatively unfazed by the other supposed challenges to markets’ health.

Just 23% believed Russia’s woes hurt a lot, while 52% said they hurt a little.

As for impeachment, just 18% said that process was hurting the investing climate a lot, while 50% said it had no effect.

For some reason, Gallup decided to ask what effect the civil strife in the Serbian province of Kosovo was having on the investment climate. Not surprisingly, just 5% of respondents said it hurt a lot.

Most likely, even the majority of U.S. college graduates couldn’t locate Kosovo on a map.

That’s not a knock on our collective intelligence. It’s a symbol of our fortunate status: The best U.S. economy in a generation, as Fed Chairman Alan Greenspan has termed it, has huge momentum all its own.

It will take a lot to reverse that momentum. For now, investors may be warier than they let on, but most still don’t see in the current mix of global and domestic challenges anything scary enough to hit them where they live, work or invest.

Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

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What Investors Worry About

The Asian economic crisis is the problem weighing most heavily on the investment climate, a new poll by brokerage PaineWebber and the Gallup Organization suggests. However, the survey of 1,001 individual investors was conducted between Nov. 9 and Dec. 7. before the U.S. attacks on Iraq. The percentage of respondents saying each issue hurts the investment climate “a lot”:

Asian crisis: 51%

Russian woes: 23%

U.S.--Iraq dispute: 19%

Impeachment process: 18%

Hedge--fund bailout: 13%

Brazilian woes: 11%

*

Note: Those polled have total savings or investment of $10,000 or more.

Source: PaineWebber