As for the Nasdaq, what a show! It has soared 48 percent on the backs of yesterday’s crowd pleasers, techs and telecoms–even counting its drop last week. As many remorseful players know, the Nasdaq remains 70 percent below its March 2000 high, but who’s counting? New buyers rolled in profits this year while long-term holders regained some of the money they lost when the bubble burst (or will, if they take some profits out).
But on that magic, nondescript October day, Main Street investors were out of the game. Individuals pulled a record $49 billion out of U.S. stock mutual funds last July and kept selling, on balance, over the following seven months. Typically, folks don’t trust a new bull (if that’s what this is) until prices are up by 30 percent or more. So that first, sharp rally passes you by (after all, how could you have guessed?). But there’s still time to play. Cyclical upturns after bear markets may last as long as two years, says Steve Leuthold of the Leuthold Group in Minneapolis.
Of the money that did go into stock funds–and June saw the highest inflows since March 2002–investors made pretty cautious choices, reports Lipper, a firm that tracks mutual-fund data. You liked real-estate funds, funds that bought dividend stocks and balanced funds containing both stocks and bonds.
Still–step by step–Main Street is feeling bullish, even waggish, again. The economy seems to be validating the market’s gains. Growth, sales and profits are coming in stronger than forecasted, and business investment has been picking up. Low short-term interest rates make it easy to borrow and invest. The dollar is dropping and will probably go lower–a plus for exporters and companies with plants abroad. The latest tax cuts raised paychecks last month and a $400 child credit is in the mail for middle- and upper-class parents (low-income parents get zip). Counting the massive federal deficit, policy is about as stimulative as it can get. It’s enough to remind you that we’re approaching an election year. By 2004, Bush hopes that jobs will be more plentiful, too.
Easy money encourages risk taking, so “there’s a good chance that stock prices will surprise on the upside in the months ahead,” says Martin Barnes, managing editor of the Bank Credit Analyst. Margin debt jumped by 7.7 percent in May, the largest gain since the bubble burst. There’s a close correlation between the level of margin debt and the prices of Nasdaq stocks.
But give up your dream of seeing Nasdaq at 5000 again. After a bubble bursts, it can take decades for prices to regain their old highs. Sometimes they never do.
That doesn’t rule out periodic and powerful cyclical rallies, Barnes says, especially when interest rates on risk-free investments are so low. The dividends paid on S&P stocks are decisively above short-term rates for the first time in 40 years–and they’re now taxed at only 15 percent.
As always, risks abound. Maybe we’ll get entangled in multiple Middle Eastern wars. Oil prices could rise. Jobs are scarce. We’re nowhere close to solving the problem of rising medical and Social Security costs. Long-term interest rates may soar (and stocks collapse) if the market decides that Congress and this administration have no interest in cutting the federal deficit. From the gloomy side of the street, maybe the rising market is merely a bear trap.
Whether you’re gloomy is something you’ll have to decide yourself, and last week’s droopy market wasn’t encouraging. But typically, bull runs pause to consolidate after the first jump up. They yawn and sidle along for a while, then suddenly leap again. To catch those short and violent upward moves, “you gotta be there,” Leuthold says. That means holding your nose and buying in, despite the worrying dips and plateaus. Most investors are no good at timing buys and sells. Instead, split your money between stock funds and bond funds, hang on and hope that gains will soon wash over you.
It’s smart to keep holding bonds, just in case the economy doesn’t turn out the way you think. But it also makes sense to lighten up when a market gets obviously out of whack. Treasury bonds have been floating in a mini-bubble of their own and you heard the splat last month. Long-term Treasury funds are down 6 percent from their June 2003 peak. A-rated corporates dropped 10 percent. Still, bond-fund holders earn interest income. By reinvesting the interest, you reduce your loss–especially if you keep adding money to the fund.
Investors who lost a lot in the bubble hope the stock mania can be revived, so they’ll get their money back. But in a generation, madness rarely strikes the same asset twice. Little speculations may be spiking up, but we won’t see the innocence and exuberance of the late 1990s again.
