Stock Volatility Testing Investors’ Convictions
Flight attendant Gloria Stern Quinn got so spooked by the faltering stock market recently that she sold out of it in midair.
Rather than wait for her flight to land, which would have meant delaying the transaction by a day, Quinn phoned from the plane to transfer her retirement savings from a stock fund to a conservative money-market fund.
But soon after she made the switch, Quinn had a change of heart. When a passenger argued that she was “nuts” to get out of a stock market that had been so good to her, the Santa Monica resident put the money back into the equity fund the next day.
“It was kind of like panic,” Quinn said of her hasty sale. “It’s disconcerting when you work hard . . . and then you come home and [check your portfolio] and you’ve lost $2,000 or $3,000” in the market’s latest swing.
Quinn has plenty of company among individual investors who are suddenly having second thoughts about the stock market after its phenomenal 10-year advance.
On the whole, it’s likely that the vast majority of individuals are still reciting the mantra of long-term investing for retirement, believing they’ll recoup their losses if they simply hold on long enough.
But amid unprecedented volatility this year, the deepest declines for key market indexes since at least 1990 and the collapse of major technology stocks that investors had viewed as ironclad, such convictions are being sorely tested.
Some analysts believe that the market is at a critical juncture. Because the historical precedent is strong for a year-end rally, many professional and individual investors alike are betting that share prices are poised for a sharp rebound.
But that also is a big risk: If a rally doesn’t occur, it could be the last straw for some dejected recent investors who have lost large sums, as well as for longer-term investors who fear that their substantial stock nest eggs face sustained erosion.
“A lot of people are expecting a great year-end rally. If they don’t get it they’ll be sorely disappointed,” said Louis Navellier, a mutual fund manager based in Reno.
The stock market, of course, doesn’t just go up all the time. On many occasions in the last decade share prices have stumbled, and for some of the same reasons they have this year: fear of economic problems, fear of higher interest rates and rising oil prices, and worries that share prices are simply too high relative to companies’ growth prospects.
But most of the market declines of the last 10 years have been short-lived. Investors who “bought the dips”--snapped up stocks when prices tumbled--were often quickly rewarded with higher prices.
This year, beginning with the technology-stock sector’s plunge in March, many investors who rushed to buy shares as they plummeted have been burned as prices have either stayed down or gone even lower.
Since early September, another steep slide in the big-name tech stocks that small investors came to trust in the 1990s--Microsoft, Intel, Dell Computer and WorldCom, among them--has taken prices to levels few thought possible.
“There’s nothing you can own now and say, ‘Oh yeah, I feel safe with this stock.’ That old song, ‘No place to run, no place to hide’--that’s what Nasdaq has become,” said Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School.
Despite a recent rally, the tech-dominated Nasdaq composite stock index is down 32% from its March 10 all-time high. That marks the deepest decline since 1973-74, which was the worst U.S. stock bear market since the 1930s.
The blue-chip Dow Jones industrial average, while down a less significant 7.7% from its peak, hasn’t made a new high since January.
What’s more, the market’s day-to-day swings this year have been nothing short of dramatic. Of the Nasdaq index’s 10 biggest one-day percentage losses in its 30-year history, four have occurred since March. Yet so have eight of the index’s biggest one-day percentage gains.
Reluctant to Sell, Hesitant to Buy
Not surprisingly, some investors say the market’s struggles are wearing on them. Many still are reluctant to sell stocks. But for the first time in a while, they also are hesitant to buy more.
“I have money to invest and I’ve been thinking about whether to put it into the stock market or into apartment buildings to get an income stream coming in,” said Nancy Bennett, a 61-year-old Los Angeles lawyer. “I’m going to go for the rent money this time. A few years ago I would have thought, ‘I can easily make 25% in the stock market, so why shouldn’t I?’ ”
Said Marianne Robertson, a Beverly Hills nutritionist: “I don’t know what to do, so I’m not doing anything.”
Others, however, remain upbeat, pointing to a still-vibrant economy and a feeling that the worst of the selling is over.
In the latest sentiment survey from the American Assn. of Individual Investors, 51.6% of respondents said they expect stocks to head higher during the next six months, compared with bullishness readings as low as 27% after the market’s dive in spring.
“I think there’s going to be a broad rally. I really do,” said Janie Crane of Pacific Palisades. “I could go pick stocks to sell and then regret it the next day” if they rally, she said.
Optimists say that the presidential election will erase some investor uncertainty, and that the Federal Reserve, at its mid-November meeting, could indicate that it believes the economy has slowed enough to preclude the need for additional interest-rate increases.
Stock mutual fund investors--who now have $4.4 trillion in funds, up from $1.3 trillion as recently as 1995--continue to be buyers, on balance. Even as the market slid in September, investors pumped a net $17.3 billion in cash into stock funds.
AMG Data Services, which tracks fund purchases and sales, estimates that cash inflows have accelerated in the last two weeks, particularly in aggressive areas such as technology and smaller stocks.
And history is on the bulls’ side: November, December and January have, on average, been the stock market’s three strongest months.
Psychological Impact if No Rally Follows
But investors can trip themselves up by counting too heavily on seasonal trends, Siegel warns. He fears that trust in a year-end rally now is so strong that investors will be devastated if a rally doesn’t materialize.
“It’s the first time ‘buying on dips’ will have proved to be such a failed strategy,” he said. “If that psychology is broken . . . it can take a long time for this thing to turn around again.”
Some Wall Street pros believe that battered technology stocks, which led the market for much of the 1990s, face so many skeptical investors now that it will be extremely difficult for them to regain their former momentum soon.
That, in turn, could leave the overall market rudderless, they say.
“For the market to shoot much higher from here will be difficult,” said Edward Keon, chief quantitative analyst at Prudential Securities in New York.
Others point out that many non-tech stocks have, in fact, surged this year--including such “value” stock plays as utility, oil and financial issues. The problem for small investors is that they generally have ignored those areas in favor of technology since 1995.
Some investors say the lesson has been a good one.
“This is a market that reinforces the importance of diversification,” Bennett said. “I was going to get rid of [soft drink giant] Pepsico because it was sort of boring, and the same thing with my small-value-stock fund. Now that my tech stocks are slumping, I’m glad I didn’t.”
Yet the changed market landscape creates a huge challenge longer term for small investors, Keon said. For much of the late-1990s, investors made money simply by jumping aboard the glamour Internet or tech stock du jour.
Now, investors hoping to pick winners face the prospect of having to do the sort of time-consuming and monotonous stock research long preached by such market legends as Warren Buffett.
The problem, Keon said, is that “there are a whole lot of investors out there who have never had to think about that, who have no training in it and who have no belief in it.”
Pauline Stout, a 54-year-old account manager for a mortgage-banking firm who lives in Palms, agrees that “the way the market is behaving makes you take a real close look at the stocks you have. Before, you almost couldn’t lose. Now, you have to be a lot more cautious.”
But that is taking the fun out of it all for some investors--which raises questions about people’s willingness to stay in stocks, and to commit more of their savings to the market.
“I’m not a person who’s panting at the edge of the roulette table” to jump into stocks now, said Alan Crudden, a 46-year-old executive at IBM in Austin, Texas.
She’s Sitting on Tech-Heavy Portfolio
Quinn, the flight attendant, wasn’t interested in the market until she joined an investment club four years ago. She quickly became hooked, regularly watching CNBC and checking stock prices on her computer.
She also built up a tech-heavy portfolio that included Cisco Systems, Dell Computer and America Online. She has at times dumped slower-moving stocks such as Starbucks and Walt Disney to load up on more technology.
Until earlier this year, Quinn said, she was “stretching” to buy stocks, even choosing to put money into the market rather than spend it.
But now that many of her stocks have taken big hits--Cisco, Dell and AOL each is still down at least 30% from its peak--”I’m sitting with what I have,” she said.
As for the idea of buying more stock, she said: “I’d rather buy a new outfit.”
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Reason for Optimism?
November, December and January have, on average, been the strongest months of the year for stocks, particularly on the technology-heavy Nasdaq market. But some analysts question whether the trend will hold up in this year’s chaotic market. Average monthly percentage changes for the Nasdaq composite index from January 1971 through June 2000:
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Source: 2001 Stock Trader’s Almanac (Hirsch Organization Inc.)
