WHEN THE Nasdaq composite index rose to an all-time high last week, it joined the Dow Jones industrial average and the S&P 500 index as record-setting indicators that the booming American stock market is unwary of the financial crisis in Asia.
Small American investors have continued to put money into stocks, analysts say.
But the stock market is a double-edged sword, and it is these investors who might take the brunt of any significant decline in the U.S. market, as their huge consumer debt and small cash reserves could cause many to sell in a panic.
Is the average American investor really in dangerous territory now? Or will the U.S. market continue to soar?
Chief Market Strategist, A. G. Edwards Inc., St. Louis
The bears have been screaming since this bull market started that the minute it gets a cold, there will be a big Armageddon, and the market will fall. But the only thing that would cause a panic is a large increase in interest rates, and we see the outlook for interest rates as relatively stable.
Ten to 15 years ago, the baby boomers started to look ahead to increase their net worth because they knew Social Security would not hold them. They then realized that, historically, common stock is a good way to invest in the future.
In 1994, we had a stealth bear market. The Dow Jones average fell only 9.8 percent, not the 10 percent needed to be called a correction, but 75 percent of all stocks declined 20 percent or more. Still, investors continued to invest in mutual funds because they had confidence in owning selected stocks and mutual funds for the long term.
Over the years, foreign investors have actually been picking up dramatically their investment in U.S. stock, in part because of the strength in dollar.
Vice chairman and director of forecasting, Jerome Levy Economics Institute, Mount Kisco, N.Y.
Mutual fund inflows, which are perhaps the best way to gauge individual investment, have not been that great this year, compared to years past. Part of the problem is no one has good data on net buyers and sellers.
The market has tremendous momentum. But investors are much too colored by the experience of the stock market in the past 15 years. The past 15 years have been the most extraordinary in the history of the United States. They [investors] think it's normal, but it's not.
Small investors have been a steady presence. The mantra is: Weakness in the market is a buying opportunity. They will behave that way until they really get scared one day.
Chief economist at KeyCorp, Cleveland
Will the small investor panic if the market begins to decline? The evidence is strong that it's not the small investor that participates in such behavior. In the stock market crash of '87, small investors did not pull out in any big way. They stopped their inflow of funds, but did not pull out en masse.
And more recently, on Oct. 27, when you dissect the experience, you see it was the so-called professional and institutional investors that panicked and pushed prices down. It was the small investors that actually came to the plate and led stability to the market. This case could and probably will prove to be the model of any setback in market prices. Foreign investors tend to invest more in U.S. bonds than stocks. You have to look at it from the their side: If you were a foreign investor, and you see what's going on in Asia and the recession in Japan, where would you most likely want to invest? In the Japan stock market, in the Indonesian stock market or in the U.S. stock market?
Senior vice president at Mercantile-Safe Deposit & Trust Co., Baltimore
My view is that the small investor is a very stable investor and is saving for the long haul. We'll just have to wait and see if, when a cataclysmic events occurs, they'll leave the market; but I suspect not. I'd expect more [pulling out] from the professional investor because performance is such an issue.
So far, there appears to have been good flows into mutual funds, and individuals have been moving savings into 401(k)s and mutual funds. Also, merger and acquisition activity has moved the market up, as we saw in the drug industry a few weeks ago, when SmithKline Beecham thought about merging with Glaxo Wellcome. And the entrance by foreign investors, trying to escape their faltering economies, has also boosted stocks.
You have to expect that the equity markets are always vulnerable to a correction; that's healthy.
Over the last three years, you've seen stock prices up 20 percent or more, so people's nervousness is well founded. I expect that sometime in the future the market will hit an air pocket and deteriorate a little bit. But, over the long run, you can see that stocks have gone up and the dips have only been brief.
Pub Date: 3/01/98