Why Risk-Takers Can’t Stay Away for Very Long
Never before have so many brilliant people worked so hard to lose so much money.
That may well be the way investors remember 1998. Because, as it stands now, we’re certainly not going to remember this wild year as the one in which buy-and-hold, U.S. blue-chip investors finally got their comeuppance.
Here’s a number that will make a relative few stock mutual fund owners very, very happy, trigger assorted emotions among the rest, and probably make a lot of once-smug hedge fund managers start to cry: The Standard & Poor’s 500 index, the premier blue-chip index, now is up 17.6% year-to-date.
Throw in dividends, and the S&P; return nears 19% so far. If it holds, this will be the fourth consecutive year of double-digit gains for the S&P--an; occurrence which, in the annals of finance, is akin to the president’s party gaining seats in Congress in a mid-term election. Certain things just aren’t supposed to happen in the known universe.
And what about the alleged bear market we endured between mid-July and early October? It is rapidly becoming a footnote, given stocks’ dramatic rebound of the last month.
It’s true that the S&P; fell almost 20% from its peak to its low, the worst decline since 1990. Most stocks fared worse.
But for many investors, doing absolutely nothing amid that chaos turned out to be a fine course of action, or non-action. The average U.S. stock mutual fund is back in the black, with a gain of about 5% year-to-date, according to Lipper Analytical Services. That return has been weighed down by still-sharp losses in many smaller stocks.
But being up 5% is a lot better than losing the sums that managers of certain hedge funds and other such fast-moving investment vehicles have lost this year.
The rocket scientists led by John Meriwether at the most notorious hedge fund, Long-Term Capital Management, leveraged tens of billions of dollars to bet on interest rate differences among bonds worldwide. We all know how that brilliant idea worked out.
Better to have just bought the S&P; 500 this year, Mr. Meriwether. No muss and no fuss, and you would have been able to keep your client fees down as well.
But then, a lot of small investors are probably wishing that they, too, had just gone with the S&P--not; just this year, but for the last, oh, say, 15 years.
Despite the superior returns earned simply by buying and holding the stock market overall as represented by the S&P;, only 7.5% of the $1.8 trillion in general U.S. stock mutual fund assets is in so-called passive S&P; funds.
The rest of that money is in the myriad of “active” funds, whose managers try their best to beat the blue-chip market return.
The 15-year score, through Sept. 30: S&P; 500 funds up 844%, average active stock fund up 526%.
This is not an advertisement for passive investing in the S&P.; Despite the numbers, it isn’t necessarily for everyone, although it probably ought to be a core portfolio element for a lot more investors than it is.
But at the very least, the long-term S&P; numbers, and this year’s turnaround, ought to make the U.S. stock market’s doubters wonder what it will take--if we haven’t seen it already--to seriously deflate share prices and make investors go away and stay away.
Some detractors say the handful of big-name stocks that dominate the S&P--including; Coca-Cola, General Electric and Microsoft--are overpriced and are rebounding toward their old highs with little fundamental justification.
How could the Dow Jones industrial average, at 8,975.46 on Friday, be a mere 4.1% move away from its record high of 9,337.97 set on July 17? What about the general slowdown in U.S. corporate profit growth? What if the economy weakens sharply next year? What about all those depression/deflation worries that petrified the markets just a month ago?
None of that is fazing many investors right now, and that’s not so strange. The worst of the foreign and domestic crises (Russia, Brazil, President Clinton’s potential impeachment, etc.) that rocked markets seems to have passed, or at least stabilized. So what else is there to do but buy equities?
Perhaps, at this point, stocks are going up again just because they’re going up. As soon as some serious profit-taking hits, people will worry that the market will go down again as fast as it has resurged.
And maybe they’ll be right. But what will happen after that? At some point, probably sooner than later, the risk-takers will return--just as they have returned to ravaged sectors of U.S. and foreign stock and bond markets since early October.
Federal Reserve Board Chairman Alan Greenspan, in a speech to the Securities Industry Assn.’s annual meeting last week, again marveled at the level of fear in markets by late September and early October, and peoples’ unprecedented (in Greenspan’s words) unwillingness to take risk.
Indeed, that risk aversion was extraordinary, and it certainly hasn’t dissipated completely.
But the story of the 1990s has been that, with few exceptions, risk-takers have returned to troubled markets far more quickly than conventional wisdom suggested they would. Give investors a good enough price, and a reason to hope for the future, and they will buy. That’s capitalism for you.
The 1990 U.S. bear market in stocks ended months before the Persian Gulf War broke out in January 1991. How did the market know that the Allied victory would be swift? Lucky guess, maybe.
The corporate junk bond market was thought to be permanently entombed after its 1990 collapse. But it rose from the dead by 1992 as buyers returned.
After Orange County’s surprise bankruptcy in 1994, some experts thought California municipalities in general would have trouble borrowing--and that Orange County itself wouldn’t be allowed back into the bond market for a decade.
Wrong on both counts.
Likewise, the 1994 Mexican peso devaluation failed to keep investors out of the Mexican stock market for very long. In fact, the market rose 17% in 1995 in peso terms.
What about Japan and the rest of East Asia? Many risk-takers were far too early getting back into Japanese stocks over the last eight years, as the main stock index, the Nikkei-225, has plummeted from 39,000 in 1989 to 14,121 today.
Ditto for most East Asian markets over the last 15 months, as stock prices kept hitting lower lows amid the region’s disastrous currency devaluations and subsequent economic crash.
Now most of those Asian markets, including Japan, are rallying again. Whether this turn is long-lasting remains to be seen.
But does Asia’s market collapse really say anything about what might, someday, befall the U.S. market? Only this: To do the same kind of damage to the U.S. stock market, the depression forecasters may have to be right on.
Anything short of that, and keeping U.S. investors away from stocks for very long--regardless of bad news--may prove an impossible task.
Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.
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Return of the Risk-Taker
Over the last four weeks investors have flocked back to many of the same high-risk market sectors they fled in the late-summer rout. Mutual fund categories posting the biggest gains in the four weeks ended Thursday, and their year-to-date changes:
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Fund category Last 4 weeks* Year-to-date* U.S. technology stocks +35.8% +20.5% U.S. small-cap stocks +28.9% -8.9 U.S. mid-cap stocks +28.0% -0.2 U.S. telecom stocks +27.0% +18.5 U.S. financial svcs. stocks +26.7% +1.1 U.S. micro-cap stocks +25.7% -9.7 Latin American stocks +25.7% -31.7 U.S. capital appreciation +23.9% +5.7 U.S. growth stocks +22.4% +10.2 Emerging-market stocks +21.6% -26.6 China-region stocks +21.2% -15.2 Global small-cap stocks +21.0% -5.2
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Averages
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Fund category Last 4 weeks* Year-to-date* Avg. U.S. gen. stock fund +22.7% +4.6% Avg. S&P; 500 index fund +18.1% +17.8 Avg. world stock fund +17.6% -0.4%
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*Total investment returns
Source: Lipper Analytical Services
