Investors shift to `irrational abstention'

Exuberance is long gone, and lots of money with it

Confidence missing from market

More than a few up days are needed, experts say

September 09, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

The steady rate at which investors have been pulling money out of the stock market comes from a lack of confidence that will not necessarily be restored by a few up days in the market, experts said.

Investors want to see clearer signs that the economy is improving and that corporate profits are growing. They are also worried about what a protracted war with Iraq could do to the country, experts said.

"We are suffering a crisis of confidence," said Alan Ackerman, a market strategist with Fahnestock & Co. in New York. "I think they [investors] are more in a state of shock than they are in the state of irrational behavior. We have gone from irrational exuberance to a type of irrational abstention."

A sign that investors have lost faith in stocks is the sharp drop in the assets of stock mutual funds. They declined by $319 billion, or 10.3 percent, to $2.77 trillion in July from the prior month. A record $52.63 billion was withdrawn from the funds by investors in that period.

Money is being shipped to safer investments such as bond funds, which had record cash flow in July, and into money market funds.

Few experts blame investors, who have been rocked by the collapse of many technology stocks, the overall bear market and the terrorist attacks.

"It would have been irrational if it [the market] didn't go down because of these events," said Richard E. Cripps, chief market strategist at Legg Mason Inc. in Baltimore. "Investors, no question, are beaten down. They are second-guessing ... their rationale for being in stocks. It is the exact opposite of the over confidence we had in the first quarter of 2000," when the market soared.

Many investors are afraid to take risks, Cripps said. "You can' t blame them; it is human."

The market tumbled more than 355 point Tuesday, a day when news was light.

"It wasn't huge volume. It wasn't like some event had occurred," Cripps said. "It was that some selling came into the market with no buyers."

It will take time and a rising market to revive investors' confidence, experts said.

"The consumers are going to have to see sustained upward movement in the market," said Robert A. Frank, managing director of InCap Group Inc., a Baltimore-based financial-services company.

Strengthening corporate profits is also important to reviving confidence, experts said.

"We have to see earnings growth for investors to get more excited," Frank said. "Everyone is still focusing on earnings growth. What is it going to take to restore earnings growth to companies?

The economy also has to demonstrate that it is growing to make investors feel good about owning stocks, experts said. But it has been sputtering and some economists fear that the country could slip back into recession.

"The U.S. road to economic recovery is anything but robust," Ackerman said. "My best guess is that we will be in better shape economically in the first quarter 2003 than in the fourth quarter 2002." That depends on whether consumers continue to spend and whether the country is at war with Iraq, he said.

"The market is a psychological arena," Ackerman said. "Right now, we have a cloudy crystal ball. Until some of the uncertainties ... clear up it is difficult to tell how long it will take for confidence to return."

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