Higher Fear Threshold Makes Investors Braver
One of the consequences of the Sept. 11 terrorist attacks may be that investors’ threshold of fear is significantly higher now than before the attacks.
That could go a long way toward explaining why otherwise stunning disasters such as Enron Corp.’s financial collapse and the meltdown of Argentina’s economy haven’t been able to rattle global markets much, or for long. After seeing the World Trade Center implode, what used to pass for scary now pales in comparison.
An altered sense of what is truly frightening also may be affecting investors’ perception of the U.S. economy and how it will fare in 2002. A popular refrain this year-end is that Americans feel as if “everything has changed” and that, as a people, we have been through an emotional wringer.
So what could be worse than this? And if 2002 isn’t worse, it will have to be better, right? And if it’s better, won’t that be good for the stock market? Hence, the bullish tone that has dominated Wall Street since Sept. 21.
Last week, as riots rocked Argentina and its government resigned, the main Brazilian stock index gained a net 3.2% and the Mexican market soared 3.9%. So much for worries about a Latin American economic “contagion.”
But those markets’ gains were paltry compared with what happened in Argentina itself. The country’s main share index surged nearly 27% for the week, through Thursday--before a “partial” bank holiday was declared Friday, closing the market.
It appears, however, that Argentine stocks rose only by default: Analysts said shares were bid up by locals desperate to get their money out of banks, where it could be seized or frozen, and into something that the buyers believed would have a better chance of holding some value.
That mentality may seem peculiar indeed to U.S. technology-stock investors, many of whom wish they had traded even a few of their now-devastated tech shares for boring, but safe, bank CDs in 2000.
By Argentine-style logic, then, the best thing that could happen to keep the Nasdaq market recovering would be a full-blown U.S. banking crisis.
As it stands, Nasdaq has been having a tougher time lately maintaining the upward momentum of October and November. The Nasdaq composite index slipped 0.4% last week to 1,945.83, its second consecutive weekly loss. From its near-term closing peak of 2,054.27 on Dec. 6 the index has lost 5.3%, though it still is up 37% from the three-year low reached Sept. 21.
While major tech stocks have continued to pull back, the blue-chip Standard & Poor’s 500 index gained 1.9% last week and the Dow industrials rose 2.3%, finishing at 10,035.34. But those indexes also remain a bit below their near-term highs reached either Dec. 5 or 6.
Still, anyone expecting--or, in the case of potential buyers, hoping--for a broad and deep market sell-off has been disappointed so far. Whatever pressure there has been from profit-taking off the post-attacks rally, or from year-end tax-related selling, has been largely offset by other investors’ desire to maintain or increase their stock bets.
Many investors still seem more afraid of missing another rally than of being caught in a new downturn. Some buyers even have been bold enough to again use borrowed money to get into stocks: Total margin credit outstanding from New York Stock Exchange-member brokerages--that is, loans usually used to buy shares--rose 3.2% in November from October, to $148.7 billion. That was the first increase since May, the NYSE said last week.
The stock market is being supported in part by the success of the U.S. and its allies in the Afghan war, of course. It’s easy to imagine a far weaker market today if, instead of mopping up caves in Tora Bora, the Pentagon were bogged down in a land war across Afghanistan.
But the principal underpinning for the market is the widespread belief that the U.S. economy will be in recovery mode by spring at the latest.
On Friday the Commerce Department revised its estimate of the economy’s contraction in the third quarter to a negative annualized rate of 1.3% from a previous estimate of 1.1%. Many or most analysts believe the contraction continues this quarter.
With short-term interest rates at 40-year lows courtesy of the Federal Reserve, however, the economy should be turning around by the second quarter of 2002, says Merrill Lynch & Co. senior economist Stan Shipley. As Times columnist James Flanigan notes elsewhere in today’s Business section, many analysts believe a recovery is inevitable in 2002 even if Congress fails to go along with President Bush’s proposal for more stimulus in the form of tax cuts and higher federal spending.
Wall Street’s bears argue that investors should be much warier about the idea of an economic rebound in 2002. They point out that a year ago many market pros confidently insisted there was no chance of recession in 2001. (According to the official arbiter of economic cycles, the National Bureau of Economic Research, the current recession began in March, well before Osama bin Laden became a household name.)
The market’s bears also say investors should be much more fearful about stocks’ prospects, whether a recovery arrives or not. They note that many stocks already command above-average price-to-earnings ratios even based on estimates of improved earnings in 2002.
But the stock-valuation argument so far seems to be falling on deaf ears, though more technology investors may have been taking notice in the last two weeks. With money-market mutual fund yields averaging about 1.7%, people may logically feel that the reward for staying there is no reward at all, which makes the risks entailed in taking a chance on stocks seem less significant.
Investors’ normal mind-set is to be optimistic. That’s why bull markets tend to last a lot longer than bear markets. Now there is the added element of relative fear--i.e., it may be scary to think about what could go wrong in the economy and the market in 2002, but how much scarier than what the country already has endured?
And even if you don’t like the market’s prospects in 2002, there’s always 2003. Economist Richard Berner at Morgan Stanley & Co. is dour about the economic outlook for 2002, but he forecasts 4% real U.S. growth in 2003. For investors who truly believe they are in the market for the long haul, a recovery in 2003 may seem a good enough reason to buy stocks in 2002, or at least not to sell.
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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web go to www.latimes.com/petruno.
