What if they declared a bear market and nobody cared?
Pessimists among Wall Street pundits, dramatically wrong but undeterred for most of the 1990s, are bursting with moral righteousness at the prospect of a 20 percent drop in the Dow Jones industrial average–an event that if it persisted would constitute an official bear market.
Last Friday’s 230-point slide in the Dow seemed to bring a correction within reach. At week’s end, the Dow’s daily close had reached a 16 percent drop from its Jan. 14 peak. But the average is losing its role as the guidepost for investors.
On the one hand, hundreds of respectable stocks have been in bear territory for weeks. The average Nasdaq and New York Stock Exchange stock has lost a third of its value from its peak.
If the Dow reaches a 20 percent decline, many investors will look up and ask, where have you been?
On the other hand, investors continue to plow money into so-called new-economy stocks in the computer-technology, telecommunications and biotech sectors–literally ignoring the Dow 30.
The attempt last year by Dow Jones & Co. to modernize its index by adding Microsoft, Intel, Home Depot and SBC Communications has had little effect in dressing up the Dow’s relevance.
Except for Intel, the new stocks have done almost nothing to lift the Dow from its doldrums. Overall, the Dow is off 6.4 percent since the four new members joined Nov 1. SBC has fallen 30 percent, offsetting a 45 percent rally by Intel.
In the same period, the Nasdaq composite index, dominated by giant technology stocks, has advanced 54 percent.
The Russell 2000 index of small-company stocks, awakening from a long slumber, is up 30 percent and stands at a record high, 557.68.
Data from the Investment Company Institute indicates that ordinary investors have taken recent market volatility as a buy signal and are in love with growth stocks.
For January, one of the worst starts to the year in decades, a record $40 billion in net new cash flowed into equity mutual funds, up from $25 billion in December and $17 billion in January 1999.
Despite a 4.8 percent slump in the Dow in January, investors remained optimistic about the prospects for growth stocks. Aggressive growth, growth and special-sector funds attracted $40.5 billion in net new cash. International equity funds drew $12 billion.
Meanwhile, more conservative growth-and-income funds suffered net outflows of $12.5 billion, versus $9.5 billion in December.
Evidence from Lincolnshire-based benefits consultant Hewitt Associates confirms investor optimism in the face of the slumping Dow. In January, investors in 401(k) retirement plans were extraordinarily aggressive in buying equity funds for their accounts, Hewitt’s 401(k) index shows.
Small-company stock funds and international equity funds were the clear winners, in terms of transfers and fresh cash flows in 401(k) accounts.
“Many of the high relative transfer activity days saw a major shift from fixed-income to equities,” Hewitt noted. “This preference for equities represents distinct change from the end of 1999, when nearly 63 percent of transferring monies were going into … a conservative fixed-income asset class.”
The Hewitt data is telling. The firm’s index was inaugurated during the last severe market correction, in the summer of 1998. Market conditions in that period were so severe that the Federal Reserve engineered three quick cuts in short-term interest rates.
At that time Hewitt, which manages 401(k) plans for dozens of employers, found that employees were fleeing stocks for the safety of fixed-income investments.
Given the scares in the summer of 1998–a Russia debt default, a second financial crisis in as many years in Asia and the near collapse of the megabuck hedge fund Long-Trem Capital Management–investors were reacting rationally.
Today, no such crises exist. Rather, investors believe opportunities abound in growth stocks pushing the envelope of technology.
Treasury auction: Interest rates were little changed at the weekly auction of 3- and 6-month Treasury bills. The discount rate for 3-month bills was 5.67 percent, up from 5.64 percent at last week’s auction. The rate on 6-month bills was 5.76 percent, equal to last week’s rate. The coupon-equivalent rate was 5.83 percent for 3-month bills and 6.02 percent for 6-month bills.
