by John M. Curtis
(310) 204-8700

Copyright January 8, 2001
All Rights Reserved.

rashing the markets, spreading wasteful pessimism and promoting needless panic drive investors to fall on their swords. Stampeding into the land of doom and gloom, bulls are looking a lot more like dinosaurs, facing extinction stumbling into the latest Wall Street tar pit. With panic-stricken investors bailing out in droves, doomsayers are predicting a nuclear winter in the once red-hot investment community, as battered markets brace for the latest shockwave of negative thinking. "There’s a real danger to the U.S. economy. Japan’s stock market lost nearly 40% of its value in 1990—a decade later it is down even more, 64% from its peak in 1989—and its economy has yet to recover," said Mark Weisbrot, co-director of The Center for Economic and Policy Research, whipping up the bearish mood contributing to Wall Street’s latest woes. "Rational expectations," said management guru Peter Drucker, "drive the market." As long as the current negative mood continues, investors will stay on the sidelines, sheltering themselves from undue risk. Watching profit return to markets usually pulls envious investors off the bench and back onto the gravy train.

       Forecasting a bleak outlook only induces more panic when cool heads need to prevail. Trying to help markets sober up, Fed Chairman Alan Greenspan reminded pessimistic investors that things change very quickly. Slashing key interest rates, the Fed proved that euphoria quickly replaces depression when the Nasdaq rallied to its biggest one-day advance ever. But just as certainly, euphoria evaporates causing more panic selling. It’s difficult to gain traction on a slippery slope, especially when investors try to get their footing in markets prone toward selling off. As interest rates plummet, investors eventually return to the market for bigger rewards. Rotating money into 'safe havens' like bonds or Blue Chips only goes so far. Despite all the abuse, investors jump back in when the market heats up. Panicking and bailing out leads to unrecoverable losses—a little patience goes a long way. While some stocks aren’t suitable for long-term investing, most recover lost ground. Sound companies usually outlast bear markets, regain their value, shoot ahead of previous highs, and eventually pay off.

       Replacing the rose colored glasses with the dark goggles of pessimism blocks much-needed rational thinking. Though the tech-rich Nasdaq lost over 50% of its value since its peak last March, it’s still up more than 300% over the last 5 years. Like inflated real estate values, stock prices, too, ebb and flow with prevailing market conditions. While today it’s the stock market taking a beating, tomorrow it might be gold, oil or real estate. All markets run in cycles and will have their day in the sun. Suggesting otherwise denies the history of meltdowns in or out of financial markets. Since the notorious crash of 1929—and every setback since—market watchers witnessed the inevitable: progressively growing stock markets with occasional slips during periods of economic upheaval. Risky companies are always part of the investment landscape. But solid companies usually pull through the bad times to reach new heights. Why should it be any different this time around? Talking about irreversible "bubbles" fails to see how negative thinking converts sound judgment into unwarranted panic.

       Staying in the market for the 'long-term' isn’t only a clever slogan used by slick investment counselors: It’s a basic tenet that humbly reminds investors that it’s difficult to time the market. Jumping into any market carries the risk of getting in at the wrong time. But if you’re a player, timing is less significant than getting in the game. Sure, investors risk losing right off the bat, but they also stand to gain once the market rebounds. Questioning a 'buy and hold' strategy is a good thing when it comes to speculative companies without much chance of turning a profit. Watching dot.com companies close their doors and go bankrupt should remind investors that trading in volatile markets requires careful selection. While it’s easy to blame dot.coms as risky investment schemes, healthy market capitalization assures growing businesses the needed funds to expand. Bear markets choke off the capital needed by fledgling companies to grow their businesses. When the good times roll, there’s plenty of moola to go around. When times are tight, it’s a different story.

       Stock valuations aren’t based on magical formulas any more than real estate prices are based on square footage and postal zip codes. Even commercial real estate values aren’t tied to hypothetical things like gross multipliers. While there’s nothing wrong with crunching numbers, mystical pricing formulas don’t determine the value of anything. Supply and demand impacts the price of all commodities. During bear markets, values drop precisely because there are more sellers than buyers. With bloated inventories, prices drop. Whether it’s pork bellies or computer chips, lowered demand and swollen inventories suppress prices. Trying to fix stock prices to dividend rates or, even more ludicrous, to the overall growth rate in the economy is like correlating real estate to the price of tea in China. No matter how you crunch numbers, they’re not related. Stock prices escalate when enough investors start buying stocks again. As long as investors remain gun-shy, prices remain depressed.

       Today’s meltdown in tech stocks represents a needed correction to begin yet another natural cycle of growth and evolution. Suggesting that bulls are extinct totally ignores the past hundred years, proving that battered markets recover and eventually set new records. As the Fed continues to slash rates, investors will once again find stocks attractive investments. Lowering interest rates and loosening credit enable businesses to make capital investments for future growth. When the bond yields tumble, even conservative investors think twice about tying up long-term capital for minimal rewards. Like clockwork, the cycle repeats when stocks generate attractive returns. Sure, some investors stay in bonds or slow-moving Blue Chips, but most eventually returns to growth stocks driving the 'new economy.' With Bush’s plans to privatize a portion of Social Security, the Fed will have to show better skill in setting interest rates. While the next feeding frenzy is a ways off, savvy investors are already getting into position.

About the Author

John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He’s director of a Los Angeles think tank specializing in political consulting and strategic public relations. He’s a seminar trainer, columnist and author of Dodging The Bullet and Operation Charisma.

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