Despite a One-Two Punch, the Bottom Line's a Knockout
You can't keep a good market down.
For investors in most equity mutual funds, that's the motto this year. Analysts may debate whether stocks are overpriced. Journalists may reach for comparisons with the wild days of the 1920s.
But shares prices respond like a punching bag - hit them and they bounce right back.
In the second quarter, the average diversified US stock fund returned 15.37 percent, according to Lipper Analytical Services. That followed a gloomy first quarter, which brought an almost 2 percent drop and predictions of worse to come.
Among springtime's star performers: index funds. They invest in corporate giants and generally match the Standard & Poor's 500 index, a measure of stock market performance.
The S&P benchmark shot up 17.47 percent for the second three months.
Only about a quarter of diversified stock funds performed better than that average.
Some analysts now think blue-chip stocks and the index funds that invest in them are headed for a fall.
"I am not in the new optimism school," says David Blitzer, chief economist at Standard & Poor's, New York. "Before the end of the year you will see the Federal Reserve tighten [raise interest rates] and the market will get very skittish. It could end the year a bit lower than it is now."
So far, investors have bounced back from such hints of caution.
On June 23 the Dow Jones Industrial Average plunged 192.25 points after bearish comments from Japan's prime minister. It was the largest, single-day decline since the 508-point drop of the 1987 stock-market crash, though barely one-tenth of that in percentage terms.
Next day the market rallied 153.80 points, headed for another record in early July.
The market also bounced back nicely after the Fed raised interest rates in March, triggering the worst tailspin since the bull market began in 1990.
There was "no shareholder panic" during that correction, notes Matthew Fink, president of the Investment Company Institute, a mutual fund trade group. "Investors reacted calmly and rationally."
Following that 10 percent correction, in fact, the nation's 63 million mutual fund investors dumped another $20 billion into stock mutual funds, a 28 percent jump over the level in April.
Investors are enjoying huge potential profits.
Some aim to protect those profits by selling shares at any hint of trouble.
Yet inflation remains quiet; fears of more Fed rate hikes are fading; and corporate profits continue to climb.
By June 30, funds invested in science and technology stocks were doing well (up 18.32 percent). So were funds invested in Japan (up 19.99 percent), Latin America (up 19.15 percent), and in the financial area (up 17.06 percent).
Funds concentrated in gold (down 12.16 percent), real estate (up 5.35 percent), and utility shares (up 8.72 percent) fared less well.
"It is really amazing how this market keeps chugging along," says James Raker of Morningstar, the Chicago company that tracks mutual funds.
And it seems equally amazing how so many bears have become bulls.
Robert Parks, an independent Wall Street economist, had predicted a burst in the market "bubble." Last month he changed his mind. "Extraordinary and in some cases brand new forces signal that (overpriced) stocks may head significantly higher this year, and into 1998," he wrote in his market letter.
These forces include a slide in interest rates, likely tax cuts, a stronger US dollar, renewed merger mania, more money flowing into mutual funds, a decreasing supply of stock, strong profits, and an improving US trade picture.
But the higher stock prices get, the more cautions are sounded. S&P's Mr. Blitzer suggests keeping 45 percent of your portfolio in stocks. Last February, he recommended 55 percent.
"We will continue to have more volatility," he says.
"A lot of people are waiting for the other shoe to drop - another correction," adds Morningstar's Mr. Raker.
They and other experts see troubling evidence of stock fever, as more people jump into the market.
Investment clubs are multiplying, from 4,400 in 1982 to more than 30,000 today. Many investors are relative novices, without the sobering experience of a long slump in stock prices.
Companies increasingly give stock options not just to executives but all employees through their 401(k) retirement plans, according to Towers Perrin, management consultants in Boston.
The media focus on the market. Investment courses grow popular, and mutual fund managers are celebrities.
"It may be crazy to stay in the market, but it works," says Blitzer. Stock prices, measured by the S&P 500, were up 23 percent last year and 20.6 percent through June 30.