Why investors don't bolt market

The way Stewart Cohn sees it, the stock market runs on emotion. And as an investor in mutual funds, he's not going to get caught up in the emotion of the moment - fear - which is causing the market to drop precipitously.

"I'm in this for the long run," says the real estate broker, as he leaves a mutual-fund office on another down day for the market.

Like Mr. Cohn, many other Americans appear to be taking the long view and not abandoning their investments on Wall Street.

Despite the market being at its lowest point in two years, investors - both big and small - show little sign of abandoning an institution that was a great generator of wealth in the 1990s, but decidedly isn't now.

True, many day traders - the quick-selling artists who epitomized the excesses of the boom market - have stopped plying their trade. But millions of other Americans continue to buy mutual funds, invest in Individual Retirement Accounts, and build tax-deferred 401k plans.

All are doing so despite the gloom on Wall Street. The Nasdaq index, which tracks many high-tech stocks, is off more than 50 percent from its March 2000 high. The Standard & Poor's 500 index, a broad measure of many large company stocks, has lost close to 20 percent of its March 2000 value.

A drop of 20 percent or more is considered to be a "bear" (falling) market.

Slumping stocks have the potential to further erode consumer confidence. For the past eight years, consumer optimism was a prime reason the economy grew so quickly. Americans, sure of their jobs and making money in the stock market, bought new cars, remodeled their homes, and took expensive vacations. Many had doubled or tripled their earnings in high-tech stocks.

"A lot of Nasdaq stocks are owned by upper-middle to higher-income bracket people," says Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis.

One sign that the falling market has hurt this group can be found in the San Francisco Bay area. "You don't see the escalator clause as much," says the economist. The escalator clause? "If 20 people were bidding for a house, you would tell the seller, whatever the highest bid is, I'll give you 10 percent on top of it."

Expensive car index

Still, the drop in consumer confidence doesn't mean that high-end buying has stopped. In Frankfurt, Germany, DaimlerChrysler said January sales of its luxury cars were up 22 percent over a year ago, while BMW reports its sales rose 8 percent.

"Last January was a very vigorous economy and a very strong stock market, and we had people telling us that they didn't want to take their money out of the market then to buy a car," says Richard Curtin, director of consumer surveys at the University of Michigan. "Now they're buying what they wanted a year ago."

That's not likely to continue for long, though, if the market doesn't recover. "Ultimately, further declines in the market and eroding net worth are hard on the housing market and luxury sales," says Mark Zandi of Economics.com, a website.

The market may be anticipating some of this. Analysts say that one of the reasons for the drop on Wall Street last week was the continuing run of disappointing corporate earnings. Among the companies foreshadowing that their quarterly results will be disappointing were high-flyer EMC Corp., Motorola, and Sun Microsystems.

"One of the reasons why we have a volatile market is that we have a tug of war between [Fed] Chairman [Alan] Greenspan's easy monetary policy and poor corporate earnings," says Mr. Sohn. "Now it looks as if we're not going to get another interest rate adjustment until March 20, and that's forever for the market."

In fact, some investors are wondering if the Fed will lower rates again at all after the consumer price index jumped last week 0.6 percent, the largest increase in a year. "The numbers show inflation could be a concern, and now people are calling into question how much the Fed will lower rates," says Sam Stovall, a senior investment strategist at Standard & Poors in New York.

Given the uncertainty, institutional investors - such as pension funds, insurance companies, and even some mutual funds - started raising cash. "Institutions are pretty skittish," says Mr. Zandi.

That's not the case for individuals, though. At least not yet. According to the Investment Company Institute (ICI), the national association of the mutual-fund industry, last year set a record for mutual-fund investment.

"We thought it was significant that there was no net outflows from stock funds, even though there was a 40 percent decline in Nasdaq, 10 percent for the S&P 500, and six percent for the Dow," says John Collins, a spokesman.

In January, early estimates show that the money continued to flow, especially into money market mutual funds, short-term cash investments. The funds recently reached $2 trillion on assets, a record. Some of this is corporations seeking higher yields. Some is related to a higher level of cash in stock mutual funds waiting to reinvest in the market.

In the past, short-term traders often used some of this cash to buy technology stocks when they dipped. That's not happening much any more. "There's some fear by technology investors that something could be wrong," says Mike Weiner, managing director of BancOne Investment Advisors in Columbus, Ohio. "This is probably a good sign."

No more easy money

Certainly many of the day traders who were looking for short-term profits have cleared out. But "we don't see people abandoning their long-term investment programs," says Donald Berdine, chief investment officer for PNC Advisors in Pittsburgh. In fact, he says that those who continued to buy undervalued stocks are now looking at 20 percent gains over the past year.

Outside a Dreyfus office in Manhattan, many investors echo the idea that they're in the market long term. "I view this as a buying opportunity," says Karl, who did not want to use his last name. "I'm in my early 30s, and I don't need this money for some time."

(c) Copyright 2001. The Christian Science Publishing Society