Jerry Wilkinson and his wife, Joan, say they’ve “had some fun, lost a few grand, but learned our lesson.”
The Dallas couple may sound like repentant gamblers returning from a Las Vegas junket, but they were scorched not by a casino but by the stock market.
“We discovered you can lose it as fast as you can make it,” said Jerry Wilkinson, 59, co-founder of a Richardson, Texas, advertising company. “My feeling now is to go back to the professionals and let them do the investing for me. We’ve been cured.”
As the Wilkinsons have learned, the days of making easy money in the stock market may be over. Unlike the late 1990s, when millions of novice investors rode the bullet train of technology stocks to riches, today’s stock market is more volatile, more risky and more difficult to predict than the market of the late `90s, financial experts say.
Investors must face the reality that the current market doesn’t have the momentum needed for a stock to double or even triple in a month.
“The stock market of 2000 is dramatically different from the market of the 1990s. The investment tide has turned,” said Jan Holman, market strategist at American Express Co. “Now is the time for tenacity, not trading, and patience, not knee-jerk investment decisions.”
The New Market, as it’s been dubbed by Holman and other analysts, has three characteristics that appear to mark a break with the long-running bull market of the previous decade: extreme volatility, a broader focus beyond just technology stocks and increased sensitivity to corporate earnings expectations.
Here’s a look at the those factors:
First, the number of daily moves up or down of 2 percent or more in the Nasdaq stock market has reached unprecedented levels.
So far this year, the Nasdaq has moved that much on more than 60 percent of its trading days, according to a report by the Leuthold Group, a Minneapolis-based investment research company. That’s more than double last year’s rate of 25 percent, and it’s off the charts compared with the 1971-97 average of 2.6 percent.
Moreover, the volatility has extended beyond the technology-laden Nasdaq to the Standard & Poor’s 500 index, where volatility has risen to more than 20 percent of trading days this year, the most for the S&P 500 since 1938.
Market experts say volatility is a byproduct of the unprecedented rise in stock prices in recent years. The Nasdaq, for example, shot up 86 percent in 1999 alone.
The higher stock prices go, the more sensitive they become to news about corporate earnings, mergers or other market-moving events. The explosion of online trading, which dramatically increased buying and selling by individual investors, has also added to market volatility.
Jerry Wilkinson, for one, says he was captivated by the newfound ability to make rapid-fire trades though his computer, even though the constant monitoring of stock prices often left him exhausted by the end of the day.
“The increased volatility has been a real eye-opener for some people,” said Kevon Theall, manager of the Dallas office of Fidelity Investments. “Some investors thought they had a certain level of risk tolerance, and then we had that dip in April. “They got to see the other side of volatility, and it wasn’t pretty.”
The Nasdaq dropped from its record high of 5048.62 on March 10 to a low of 3164.55 on May 23, a 37 percent decline.
On one day alone, April 14, the Nasdaq dropped 356.74 points, or 9.7 percent, its biggest point loss ever. However, it rebounded in late May and early June, recording its biggest gain ever on May 30 of 254.37 points, or 7.9 percent.
“This kind of volatility usually indicates a transition from one type of market to another,” said Chuck Zender, managing director of the Leuthold Group. “It indicates uncertainty, a lack of confidence and direction. Maybe we are in the first or second inning of a bear market. Nobody knows. We will find out.”
For investors who aren’t within a few years of retirement, the best advice is to take advantage of falling prices and continue to invest regularly, a strategy known as dollar-cost averaging. Investors can ease the pain of watching the value of their portfolios shrink by remembering they are buying stocks at what could be bargain prices.
The second distinguishing feature of the New Market is investors’ cooling love affair with technology stocks, which led the market throughout the late `90s.
The almost obsessive focus on tech stocks, especially Internet-related issues, gave the Nasdaq composite index a cachet rivaling that of the Dow Jones industrial average. It also gave investors who buy stocks that promise strong earnings growth what looked like a permanent ascendancy over value investors, who look for beaten-down stocks in neglected industries.
But value investing, especially in industries such as chemicals, autos, energy, pharmaceuticals and forest products, is making a comeback, said John Frankola, a money manager for Parker/Hunter in Pittsburgh. Indeed, value plays like Boeing Co., Alcoa Inc. and Johnson & Johnson have all shown signs of life lately.
“This year with the market broadening, diversified portfolios are finally outperforming concentrated portfolios,” Frankola said.
The New Market’s final distinguishing feature involves how stock prices respond to corporate earnings reports, or more specifically, earnings expectations. The stock market last year began to punish the stocks of companies whose quarterly profits fell short of Wall Street’s estimates, and that trend will gather momentum, said James Stack, editor of InvesTech Research, a market newsletter. Much of the stock market’s current valuation is based on lofty earnings projections for the next three to five years.
“Investors seem to forget how much earnings expectations are already built into stock prices,” Stack said. Hugh Johnson, chief investment officer at First Albany Corp., said there’s another problem looming on the earnings front. Companies now try to “guide earnings expectations” lower so they can beat Wall Street estimates. But analysts have caught on to that game and are now more reluctant to lower their estimates and in many cases have revised them upward for the rest of the year, he said.
“It is going to be tough for companies to beat those estimates,” Johnson said.
As the economy begins to slow — and most economists believe it has — corporate profits will diminish in the coming months, and that will hold down stock prices.
“There will be more earnings disappointments in the third and fourth quarters, which will make the going all that tougher for the stock market,” Johnson said.
For investors, the most prudent strategy in that kind of environment is to buy the stocks of companies that will post consistent earnings no matter what the economy does.
Those would include companies involved in household products, electric utilities, and food and beverage companies.
But most important, investors have to come to grips with the idea that today’s stock market isn’t the market they came to know and love during the 1990s — a fact Dallas portfolio manager Don Hodges ruefully acknowledges.
“It makes someone like myself, who has been in the brokerage business 40 years, feel like I’m in the first grade all over again,” Hodges said.
