Too late to sell? Many investors don’t think so
Maybe you can relate to this, after seven calamitous weeks in the stock market.
I own 52 shares of Gannett Co., where I worked 20 years ago at its flagship newspaper, USA Today.
Because I write about the stock market, nearly all of my investments are in mutual funds, to avoid the risk of a perceived conflict of interest. Gannett is the only individual stock I own -- just a leftover I’ve long ignored, really.
That’s the background. Here’s the point: Like a lot of stocks, Gannett has collapsed over the last year. It closed at $9.47 on Friday, down from $42 a year ago, a 77% drop.
I’ve thought about selling in recent weeks, to be rid of it. But I keep figuring it’s too late.
Sound familiar?
Meanwhile, other Gannett owners clearly haven’t shared my sentiments. The stock has tumbled for five straight weeks, falling through $18, $16, $14, $12 and now $10.
With tens of millions of other investors, I’m left to wonder about Gannett and about stocks in general: Is this massive sell-off irrational, as so many Wall Street pros keep telling us?
Or is the market signaling that we’re headed for a global economic catastrophe on par with the 1930s -- a wipeout that will destroy a massive number of companies and leave stocks of the survivors depressed for years to come?
Hour to hour on any given day, the astounding volatility of the last few months suggests investors can’t make up their minds about much of anything.
The volatility feeds the sense that the action in stocks is irrational.
But there’s a potential problem with believing you can hold on while other investors lose their wits.
As John Maynard Keynes famously put it: “The market can stay irrational longer than you can stay solvent.”
That’s exactly the problem lately for some hedge funds and other big investors that bought stocks and other securities with borrowed money. As asset prices plummet, the funds’ lenders are calling in their loans. That forces the funds to sell securities to raise cash -- exacerbating markets’ declines, and creating a vicious circle as selling begets more selling.
We’ve seen this in other bear markets, of course. And in fact, this kind of selling cascade is typical at the end of market declines, as panicked investors throw everything out at once.
But the selling wave has rolled on for most of the last five weeks. Many stocks already seem cheap, at least for long-term investors who believe the world isn’t ending.
Master investor Warren Buffett said as much a week ago, when he wrote a newspaper op-ed piece asserting that “fears regarding the long-term prosperity of the nation’s many sound companies make no sense.”
It’s time to buy U.S. stocks, Buffett said.
One week later the Standard & Poor’s 500 index is 6.8% lower, at 876.77 on Friday, its lowest level since April 2003.
“We haven’t yet seen the kind of buying you’d expect” at these prices, said Bill Strazzullo, a partner at Bell Curve Trading in Freehold, N.J.
For better or worse, many Wall Street veterans have turned into chart watchers. They’re encouraged that, even though the S&P; 500 closed at a 5 1/2 -year low Friday, it held above its intraday low of 840 reached Oct. 10.
That suggests the market is trying, in fits and starts, to carve out a bottom here.
But all of this chart watching also adds a dangerous element to the mix: If the S&P; 500 next week slides below its Oct. 10 nadir, it could trigger a fresh wave of selling by investors who figure the bottom still is far off, Strazzullo warns.
Most individual investors probably aren’t chart watchers. They’re focused on the fundamentals, and are wondering whether the rest of Wall Street has lost its mind in pushing stocks to these levels -- or whether the sellers are foretelling a disaster.
Some analysts say that, for the market as a whole, the decline so far hasn’t been as irrational as it’s made out to be.
Peter Boockvar, equity strategist at investment firm Miller, Tabak & Co. in New York, notes that in a typical economic recession corporate earnings fall between 30% and 50% from their peak levels of the preceding expansion.
The S&P; 500 index now is down 44% from its record high set a year ago. That suggests the market is looking ahead to a profit decline of about the same magnitude.
Given the severity of the global credit crisis, however, it’s entirely conceivable that this recession (which many economists believe already is underway) will be far worse than anything Wall Street has faced in at least 25 years.
So investors are left to wonder whether the decline in earnings this time around will be significantly worse than usual. Earnings, of course, underpin stock prices.
If gloom about the economy continues to worsen, more investors could decide that it isn’t too late to sell, after all -- even if, like Buffett, they figure stocks already are cheap, and that we’re not headed for a replay of the 1930s.
We’re at a point where raw emotion is dictating market moves. And to state the obvious: In bull markets, people tend to push prices beyond what would normally be considered fair prices. In bear markets they do the same, but in the opposite direction.
So I’m left to ponder Gannett’s fate, and the fate of its stock.
The last bear market, in 2000-02, ended with the S&P; 500 down 49% from its peak. That was the worst decline since the 1930s.
When that bear market ended in October 2002, however, the banking system wasn’t in crisis, home prices weren’t collapsing and the economy already was climbing out of recession.
I look at Gannett, and many other stocks already down 70%, 80% or 90% from their peaks, and wonder if they truly are victims of irrational investor behavior -- or the vanguards telling us where the rest of the market is going before this nightmare is over.
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