After the Fall

Times Staff Writer

For Polly Sveda, the decision about what to do with her future savings doesn't hinge on the outcome of any U.S.-Iraq war.

Others may be planning to go bargain hunting for beaten-down shares as soon as the showdown is resolved. For her part, Sveda thinks she may never buy stocks again. She's 31 years old.

"I don't trust it anymore," she says of the market. "I should never have trusted it."

U.S. stock indexes are three years and trillions of dollars -- and counting -- from their zeniths. Enough time has passed to allow investors to come to grips with their losses and decide how their bear market experiences will affect their future financial choices.

Many people have maintained a stoic long-term optimism about stocks, remembering the oft-quoted figure that the market has produced an average annual return of about 11% historically. Others may be less confident that future returns will match the past but still see the market as a better alternative to earning 1% in a bank savings account.

Lightning rallies like the one that lifted the Dow Jones industrials nearly 270 points Thursday offer hope that, post-Iraq, the picture could improve substantially. The Dow climbed again Friday, closing 38 points higher.

But for people such as Sveda, a radio producer who lives in Pasadena, no rally may be enough to entice them back into the market.

After her stock mutual funds lost a third of their value, Sveda also lost her job in 2001. She had to cash in her remaining portfolio for living expenses. Seeing her nest egg decline "forced such frugality on me," Sveda says. "I realized the market is just gambling."

She is part of what some on Wall Street have dubbed the "lost generation" -- individuals who have no more appetite for stocks, period. It's a group of people who share a mind-set rather than an age range or socioeconomic status.

Just how many are in this camp is impossible to say. But if the numbers are significant -- or if they become significant because the long bear market has yet to run its course -- a sustained recovery in share prices could be much more difficult.

That, in turn, could make it harder for companies to raise capital, threatening to limit the economy's potential.

There is plenty of evidence that a growing number of individuals are shunning stocks. For example, equity mutual funds saw more money flow out than in during 2002, the first time that has happened in a calendar year since 1988.

What's more, a Hewitt Associates index that tracks how 1.5 million workers allocate their contributions to 401(k) retirement plans found that 61.3% of the money went into stocks in January, the lowest since Hewitt launched the index in 1997. (The rest went into fixed-income investments such as bonds.)

Some evidence is more anecdotal but underscores the trend: The number of investment clubs registered with the National Assn. of Investors Corp., an umbrella organization, dropped to 30,278 as of December. That was down from 36,151 at the end of 1999.

Wall Street already knows what it's like to lose a generation.

It happened during the last severe bear market, in the 1970s. Individuals first were burned by a plunge in that era's hot young technology stocks in 1969 and 1970. Mohawk Data tumbled 84% from its 1968 high, Teledyne slid 82% and Optical Scanning lost 89%.

Then people were stung by a collapse of blue-chip shares in 1973-74 -- companies such as Polaroid, IBM and Coca-Cola. The result: Many fled the market and didn't return for a decade or longer.

Even as stocks rallied periodically in the late 1970s despite high interest rates, every year more money left equity mutual funds than came in. Millions of potential investors found other things to do with their cash. Real estate was hot. So were money market funds, gold and oil-exploration limited partnerships.

The number of investment clubs plummeted from 14,102 in 1970 to just 3,642 by 1980, according to the NAIC.

With a big segment of the public turning its back on equities for one reason or another, the Dow index didn't return to its 1973 peak of 1,051 until 1983.

Today, the question of whether another generation has been lost engenders a lot of debate. This is an emotional time for investors, as it is for the nation overall. After three years of falling stock prices -- and with many shares deep in the red again this year -- it's natural for people to say they're fed up and leery of sinking another dime in the market.

The rash of corporate and Wall Street scandals over the last year obviously hasn't done anything to help confidence either. Now, war fears dominate.

Still, a big rally could change a lot of minds in a hurry. Greed might again trump fear.

If the market started roaring back, many investors could find it hard to stay away, especially if a stock purchase simply entailed a few mouse clicks.

"Right now, people feel like they're making progress when they're out of the market," says Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis. "But if we have one year of equities producing double-digit returns, I think people will say, 'I can't afford not to be in there again.' "

Further, many market pros contend that if the war issue is resolved and it's clear that the economy isn't headed back into recession, the fundamentals don't justify a severely downbeat attitude toward stocks' long-run prospects.

"A lot of people have been extrapolating the recent past into the distant future," says Kurt Brouwer, a principal at financial advisory firm Brouwer & Janachowski Inc. in Tiburon, Calif. "Some ask, 'What if the market never comes back?' But unless you think we're doomed, it's hard to imagine American companies never doing well again."

In fact, corporate earnings, which ultimately drive share values, began to rebound in mid-2002 after plunging during the 2001 recession. The average blue-chip stock, as measured by the Standard & Poor's 500 index, is priced at about 16 times S&P;'s estimate of 2003 operating earnings per share. That isn't historically cheap, but neither is it grossly expensive, market bulls say.

Another argument against the idea that large numbers of investors will desert stocks is that equities face far less competition than they did, say, in the '70s. Short-term interest rates reached double-digit levels then; today they are at 40-year lows. And housing prices already have risen sharply over the last three years, leaving many potential home buyers justifiably afraid of buying property at the peak.

Poverty Consciousness

Some experts also contend that investors are guilty of overreaction: Though it's true that this bear market is the longest and deepest since the 1930s, major indexes including the Dow, the S&P; 500 and the Nasdaq composite have so far given back five to six years of their bull-market gains. That is a modest destruction of wealth compared with the 12 years of gains wiped out by the 1973-74 bear market and the 18-year giveback of the 1930s bear market.

To put it another way, long-term investors still are well ahead, even with the S&P; 500 index down about 45% from its 2000 peak. The index's average annual total return is about 9% since Dec. 31, 1989.

"Our financial position is not bad," says Meir Statman, professor of finance at Santa Clara University. "It just feels bad because we no longer collectively feel rich."

Still, as rational as it may be to stick with stocks, that doesn't mean the market isn't in danger of mass defections.

Neta Gagen, a certified financial planner in Garden Grove, notes that stocks can be a particularly hard sell to older investors these days. Most of her clients are retirees, and "some are so close to pulling the plug" on equities, she says, that "it's day to day."

Though their portfolios are diversified, with 40% or more of assets in bonds, many clients can't stand the thought of losing more of their hard-earned money to another leg of the bear market. "They're at the point where they can see their lifestyle changing dramatically" if the stock market were to plunge anew, Gagen says. At a minimum, "very few want to put more money into the market."

At the other end of the life-cycle spectrum is Polly Sveda.

In theory, at her age, stocks are a slam-dunk. If she works 30 years more, that should be plenty of time for the market to generate its vaunted double-digit returns, despite the occasional downturn.

But Sveda says the experts who tout that line aren't realistic about young people's financial challenges.

"A lot of people my age have been laid off, and have had to cash in their investments" to pay living expenses for a time, she says. Sveda believes that she and others should have been paying more attention to capital preservation -- by keeping money in the bank -- than taking a chance on stocks.

Even if there are millions of disillusioned small investors such as Sveda, it's legitimate to ask whether the market needs them to rebound.

There is no doubt that individual investors' hunger for shares helped fuel the bull market. Stock mutual funds took in $1.1 trillion in net new cash from 1996 through 2000, according to the Investment Company Institute in Washington.

But small investors are just one source of demand for stocks. Strong buying by public and private pension funds, hedge funds, insurance companies and foreign investors, among others, conceivably could push up share prices even if small investors balk.

In 1988, after the 1987 market crash, mutual funds experienced net redemptions for nearly the entire year. Yet blue-chip indexes rose 12% in '88.

Pragmatic Faith

Of course, Wall Street is hoping that the majority of the 49 million households that are estimated to own stocks in one form or another aren't ready to call it quits. For every Polly Sveda, there may be many more like Bill and Muriel Berks of Manhattan Beach.

The couple, in their early 70s, say they sold some of their shares recently as war fears hit the market. But they still have about 30% of their assets in stocks, Bill Berks says.

"And if the war goes well," he says, "I think I'll kind of sneak back in" to buy more. Mindful of the market's long-term performance, "I'd be uncomfortable being totally out of equities," he says.

But Muriel Berks says she has insisted over the years on keeping a large portion of the couple's assets in fixed-income investments, for safety's sake. Given what's happened to stocks since 2000, they're both glad they did so.

"Both Bill and I are old enough to remember the Depression," Muriel Berks says. "It's very dangerous to have total confidence in the stock market."

Tom Petruno can be reached at For recent columns on the Web, go to

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