Trying to balance greed and fear

Stock analysts worry investors are turning irrationally fearful

Half-full glass looks empty

March 14, 2001|By Robert Little | Robert Little,SUN STAFF

For those whose fortunes have been laid waste by the stock market in recent weeks, don't fear. Because if you fear too much, some economists and strategists say, you might make things worse.

Just as "irrational exuberance" touched off the market's ear-popping rise four years ago, "irrational depression" may now be precipitating its decline, some market watchers say.

"You started out with the feeling that the glass was half full, then the glass was half empty, and now there's a mood that the glass has nothing in it at all," said Alfred Goldman, chief market strategist for A. G. Edwards & Sons Inc.

The Commerce Department offered further evidence yesterday of an economy gone soft: Retail sales slipped 0.2 percent in February.

The stock market did show a gain, with the Nasdaq composite index gaining 91.40 points, or 4.8 percent, and the Dow Jones industrial average increasing 82.55, less than 1 percent.

But that followed a plunge Monday of 129 points in the Nasdaq and 436 points in the Dow. It was the Nasdaq's first close below the 2,000 mark since December 1998.

Consumer confidence also fell, for the fifth straight month. Analysts are as certain as analysts can be that the Federal Reserve Board will cut interest rates when it meets next week.

And yet, encouraging economic signs surfaced as well.

Just as it announced its dip in retail sales for February, the Commerce Department revised its January estimates to show a 1.3 percent rise. Sales of cars and trucks were up.

Readings of the extent of the economy's current malaise are a matter of dispute, as are predictions about whether stocks will fall still further after Monday's dive.

But consumer confidence has been so brow-beaten that some observers fear it could become as potent a market force as the economy itself.

"In any bubble, or mania, things go to their extremes," said Robert F. Mewshaw, president of the Lutherville money management firm VanSant and Mewshaw.

"Greed drives people on the up-side, and fear drives them on the downside. We might not be in the fear mode yet, I don't think, but we're out of the greed mode."

Mewshaw said the stock market has much more room to fall. The economy is already in a recession, he said, and people are only now beginning to realize it.

While such a view is by no means universal, concern that a full-blown slowdown is afoot has taken root as investor profits continue to wilt and consumer debt remains high.

"Hey, this is not a fiction. The economy has stalled," said Peter Canelo, investment strategist for Morgan Stanley Dean Witter. "We just had a major energy scare, people stopped spending, you've had a manufacturing adjustment, a capital spending slowdown - the stock market isn't gyrating like this for no reason."

Monday's decline meant the Nasdaq index had fallen 62 percent since its record high March 10 last year.

And others blame not a true economic calamity, but the illusion of one. By losing so much so quickly - even if only on paper - families that felt flush a year ago are suddenly feeling pinched, notching down their spending and withdrawing from the market, even though their expendable income is little changed.

"The perception that we're in a recession is there, and it's being created, in my opinion, by the 62 percent drop in the Nasdaq," said Goldman, the A. G. Edwards strategist. "But the drop in the Nasdaq doesn't mean the end of the U.S. economy, or the end of the technology revolution, or the end of the Western world. It means that tech stocks were run up too high."

Analysts said a true crisis of confidence - a widespread collapse in share prices without any balance sheet problems to explain them - can't truly be identified until the scare reaches more Old Economy stocks, such as financial companies and manufacturers.

So far, the bottoms have been probed mostly by companies with little earnings and little prospect of getting them.

"Let's face it - some of those Nasdaq stocks are going to hit zero," said Maureen Allyn, chief economist for Zurich Scudder Investments. "You have to be careful, because there's clearly that under-current of worry. But it's just been fairly contained. If you followed that stupid advice everyone was giving last year - diversify your portfolio - then you're really not in bad shape."

Said Alan Levenson, chief economist for T. Rowe Price: "We may be seeing an irrational correction to an irrational rally, but the sector had to move toward a more sustainable pace."

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