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Stock stillness

Despite signs of economic recovery, investors are still holding their breaths (and wallets): Has the stock market bottomed out yet?

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published June 16, 2002

Depression sets in when Inverness retiree William Manion checks his investments.

"Sometimes I wonder whether I should ever have known there was a stock market," he said. "I'm supposedly a long-term investor, but the way things have been going now for a couple of years, I'm not so sure I'm going to live long enough to see it turn around."

And what's he doing about it?

"I'm just sitting here watching things go to hell," said Manion, 78, a former accountant. "At this point, if I sold anything, I'd just be selling at the bottom. But I'm afraid to buy anything. I'm not so sure it ain't going to go down another 50 percent. I'm stuck with what I've got."

Manion has plenty of company. By at least one measure, investors are the most pessimistic they've been since the prolonged bear market of the mid 1970s.

Since their peaks in 2000, the Dow Jones Industrial Average is down 19 percent, the Standard & Poor's 500 Index 34 percent and the Nasdaq Composite Index an astonishing 70 percent.

"This is the worst kind of bear market," said Gerald Perritt, a Largo money manager and publisher of the Mutual Fund Letter. He compiles a Misery Index based how much the S&P has declined from its peak and how many months the pain has lasted. By that measure, you would expect investors to be feeling nearly as bad as they did in 1973-74 and far worse than they did following the stock market crash of 1987.

In both the current decline and the 1987 crash, stocks lost a third of their value. The big difference? In 1987, the damage was compressed into just three months. This time it's gone on for more than two years.

Perritt said the problem isn't that investors are bailing out of stocks.

"We're getting the normal amount of selling that goes on from day to day in the market," he said. "What's missing are the buyers. They're not there, so prices keep winding down and down. It's like going down a staircase; the momentum takes over."

But don't hold your breath waiting for investors to jump back in.

Polls show investors have lost trust in business leaders, accountants and brokerages at the same time that earnings worries and terrorism fears hang over the market. Add all that up, and you get paralysis.

"There's good reason for the average individual investor to be plenty scared and to lack confidence in the integrity of the market," said Roger Schwab, 77, a Clearwater investor who once worked as a brokerage analyst.

In fact, a whopping 57 percent of Americans say they do not trust corporate executives or brokerages to give them straightforward and honest information, according to a Wall Street Journal/NBC News poll released last week.

The collapse of Enron Corp. raised investor skepticism to new levels. The Houston energy company used accounting tricks to project an image of financial health, and investors who relied on the information lost millions as Enron plunged into bankruptcy. The company's auditor, Arthur Andersen, shredded documents and was indicted for obstructing justice.

But the damage didn't stop with Enron. The shenanigans raised doubts about what's going on at other companies. In the Wall Street Journal poll, 31 percent said the Enron debacle is representative of problems at many U.S. companies.

In a poll conducted last month by UBS PaineWebber and the Gallup Organization, 84 percent of investors said questionable accounting practices are hurting the investment climate in the United States.

Also undermining investor trust have been revelations that analysts at Merrill Lynch were touting stock in public that they were bad mouthing in private. Merrill Lynch agreed to pay a $100-million fine to settle charges the New York company misled investors. Both Merrill and other full-service brokerages are being forced to change the way their research analysts operate.

Some discount brokerages have tried to turn the situation to their advantage.

"You want a fortune teller, go to the circus. You want information you can trust, TD Waterhouse," says the crusty investor TD Waterhouse features in print and broadcast advertising.

Charles Schwab ads brag that its brokers are not paid commissions and that the company steers clear of investment banking conflicts of interest. CBS-TV refused to run one Schwab commercial in which a broker urges colleagues to push a stock with lousy fundamentals, saying, "Let's put some lipstick on this pig." The network said it doesn't allow ads disparaging competitors.

But advertising alone will not overcome investor fears.

Schwab said its customers are doing less than half the number of revenue-generating trades they did at the bull market peak two years ago.

Mutual fund sales were showing signs of promise. Through April, net stock fund sales were up over last year. However, anecdotal reports from brokerage firms and fund companies are that June brought a noticeable slowdown in both stock and mutual fund activity.

"It's just quiet," said Rick Metzger, a broker for A.G. Edwards & Sons in St. Petersburg. "People don't want to hear the word "stock.' "

He said many investors are frozen, holding on to shattered technology stocks, waiting for them to come back. He says they never will.

"Tech's busted," he said. "There will be another speculative bubble, but the companies that go to the top of the heap will not be the same companies that led last time around."

In more usual times, the current signs of economic recovery would be encouraging more investors to put new money in the market.

"In the past, the market would have anticipated the economic recovery," said Tracy Eichler, market strategist for UBS PaineWebber in New York. "Now the market's become a lagging indicator. What investors are saying is "Show me that the economy has recovered and I'll take it a look at it.' "

In last month's UBS/Gallup survey, only 41 percent of the investors said they thought stocks were a more promising investment than bonds.

But even the experts are divided about whether this is a good time to invest in the stock market.

"We're at the stage where you should be putting money to work," Eichler said. She said UBS PaineWebber expects the current quarter to be the last one in which most companies will report that they earned less than in the same quarter last year. "The third and fourth quarter we will see double digit earnings gains," she predicted.

"Four things move the market: earnings, interest rates, fear and greed," she said. "Right now it seems to be fear. The key is getting investors focused back on earnings."

But Standard & Poor's Investment Policy Committee recently recommended that investors cut back their stock exposure from 60 percent to 55 percent of their portfolios. The reasons? Stock prices that remain unjustifiably high and negative pressures on the market, ranging from global tensions to investor pessimism.

The cross-currents have left a lot of investors confused.

"I'm looking for possible bargains to be purchased at depressed prices, but I'm rather concerned that the market has been depressed for so long and doesn't appear to be recovering in the near term," Clearwater investor Patrick Raftery, 54, said.

The pain is personal. His daughter, Elizabeth, is headed off to Emerson College in Boston this fall, but the funds he set aside to pay her expenses have shrunk.

"We kept it in a blue chip fund with solid, good companies," he said. "We did fantastic for the longest time, but then everything got caught up in the downturn in the economy and just didn't recover."

Other investors have seen their retirement savinges take a hit. Over the past two calendar years, the average 401(k) account balance has dropped from $45,680 to $36,390, according to statistics compiled by Cerulli Associates Inc. in Boston.

"I'd like to be able to retire in the next couple years, but it's not likely," St. Petersburg investor Diane "Sam" Pittman, 53, said. Her biggest mistake: holding shares of Tyco International Ltd., which are down more than 70 percent from last year's peak. The company has been under fire for its accounting; last week, its chief executive resigned in the face of federal and state investigations.

"I never imagined it could go down so much," she said. "I don't want to take the money out now because I will have lost so much."

But Pittman said she still is putting money into the market through her regular contributions to her 401(k) and an employee stock purchase program at Odessa Auto Auction, a unit of Allete Inc.

"People know they still have to invest and save," said Tampa financial planner Brian Hershberger, president of Omni Tax and Financial Advisors. "But a lot of people have changed their allocations to become more conservative."

Tampa investor David Morgan, 49, said he got out of stocks after the Sept. 11 terrorist attack, but gradually put all his money back in, and then some. He's now actively looking for new investments.

"In the long run, getting out was a stupid strategy, but had there been a second attack, the stock market would have really plummeted," he said. Morgan, a pharmacology professor at the University of South Florida, said he thinks the economy is improving and the stock market will follow suit.

"We're not where we were in 1930," he said. "We're not seeing the entire infrastructure crumble because of bad debt. What we're seeing is mild recession and rebalancing of the market. It's the potential for adverse world events that have the market unsettled now."

Tampa investor Susan Wendt, 49, said she's also buying again after lightening up on stocks last summer.

"I'm cautiously buying what I know," she said. Wendt, who owns a marketing firm, said she is researching companies in the marine industry because she expects boating to pick up next year. The market's decline doesn't particularly concern her.

"I'm really looking 20 years down the line," she said.

Clearwater investor Schwab said he is sticking with mutual funds and advises other investors to do the same.

"It's a time to keep a very low profile and put your trust in good money managers who know a lot more and are privy to much better advice than the average broker can give," he said.

Inverness retiree Manion said he's just glad he has a pension and doesn't have to depend on his investments for income.

"It seems like every day there's something else," he said. "If it isn't Israel and the Palestinians, it's India and Pakistan. You get the idea that people think the whole world will blow up. It seems like there are so many things that are affecting the market, I can't see them all turning around in a short period of time."

-- Helen Huntley can be reached at or (727) 893-8230.

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