LONDON, 15 March 2004 — Stock markets worldwide have suffered a drastic slide in the past few sessions as investors became exceedingly apprehensive about the weakness in the US economy and the prospects for sustainable growth and profitability.
The gains in the Dow Jones Industrial Average and the NASDAQ composite indices were wiped out and stocks have plunged to a three-month low. Still, there are those who strongly believe that stocks, although no longer cheap, are still reasonably valued and that any further pullback seems an inconceivable possibility.
Investors feel subdued these days. In the US, the pace in economic growth, productivity and stock prices is back to the 1990s level, and yet there is no talk of “irrational exuberance” in the markets. It is becoming increasingly obvious that investors are entering the market with an eye on the risk associated with their investments. Over the past 12 months, markets were up 30 percent in New York and Tokyo and 60 percent in Frankfurt, and yet a dim foreboding reigns. Why? Global interest rates are currently at historic lows creating a world flooded with cheap money that needs to be invested somewhere. Much of it has gone into stocks. Initial participants consisted mostly of large pension funds and institutions. Individual investors joined the trend hoping to catch a bull on the rise. In the process, they pushed the market to higher levels without paying any attention to basic economic fundamentals. It has been a nervous ride thus far.
When average retail investors stampede into a bull market it is typically a sign for the professionals to bail out. I believe that is what happening now.
But were we really in a bull market or was it just a stock-picking scenario. Last year, investors were buying on dips but that might not be the case in this year. They need to focus on fundamentals and value. Small-cap stocks, with their recent impressive climb, do not reflect good value and a margin of risk aversion, or safety, is warranted.
It is rather extraordinary that investors are forgetting what happened four years ago and jumping in again with all the market’s vulnerability.
Professional investment managers are expected to produce higher returns, or minimum returns, with low risk. While under pressure from investors, they have diversified portfolios into other exotic products such as: Currency and bullion trading, emerging markets, junk bonds, etc. By doing so, they have exposed their investment strategy and created a suspicion with the investors who continue to live with the hope right now.
A market crash or a bubble burst? Who knows! Well, the market has the ingredients for an irrational bubble where investors do not really believe in what they are doing, but wish to participate in a perceived boom driven by enthusiasm primarily for technology stocks. We are still, a long way from the money-making period of 1999 and 2000 notwithstanding the recent take off.
Investors, generally speaking, are more confident and do not believe in a crash now as they did five years ago. It is better for them today to judge market performance based on fundamentals and valuations and not to get carried away with each market rally. Finally, I reiterate the advice I put forward earlier: “Given that this is an election year in the US, investors need to reflect wisely on this current upward trend, and carefully judge companies not only by earnings but by the viability of their business, management, and how realistic the growth predictions are”.
(Habib F. Faris is vice president at Clariden Bank, London.)
(The information contained here in is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information)
