Money managers say this means a much healthier market. “The mental health of the individual investor today is terrific,” says Charles Schwab, co-CEO of the firm that bears his name. “Having resources when you retire is what is important to individuals today. We had an awakening over the last two years. It allowed people to see and understand [that] they were underdiversified, had lower cash reserves and were exposed to highly volatile tech stocks. Today they understand asset allocation and the principles of investing better than before.”
They’re also calm. Throughout the long run-up, skeptics predicted that individual investors would be the first to bail out at any sign of a sell-off. In fact, they’re sitting tight. Vanguard reports that 85 percent of the firm’s clients made no investment changes in their defined contribution plans over the last six months. At Schwab, 98 percent of clients hung on to their long-term positions after September 11. Mark Winston, who oversees institutional and retail product and marketing for Janus Funds, calls it “a level of financial hibernation that has not been seen in recent times.”
Today’s new money is not going directly into the stock market. It’s being put into savings. At last check, there was $2.2 trillion sitting in American savings accounts and some $2.3 trillion in money-market accounts. The fact that the average CD pays only 3 percent and the average money-market fund about 4 percent is currently irrelevant; investors settle for a tiny return rather than risk losing money. “Money follows performance,” says Charles Biderman, president of TrimTabs.com, which tracks money flows. “Once the market shows sustained improvement the money will come back, but it won’t be a bullish sign until we see corporate investors also buying stocks via buyback announcements and cash takeovers.”
Other money managers I spoke with agree that the economy will recover by the end of the first half of 2002, led by gradually increased business spending. So far the slowdown in business investment has been the real weak spot, as companies slashed inventories and cut budgets on information technology, advertising and marketing. Payroll cuts, achieved by layoffs of 1 million employees in 2001, drained billions in disposable income from the economy. But corporate budgets will start growing again. When they do, investors should be looking for early beneficiaries. Technology companies will be high among them, especially those that make products for corporate information systems. And as companies start to rehire, look for sectors of the retail industry to recover, particularly those that are home-oriented. In recent weeks, “shelter” companies like Pottery Barn and consumer-electronics sellers like Best Buy and Circuit City have been strong performers; analysts expect that to continue. More generally, biotechnology has seen a run-up recently on the anticipation of mergers and acquisitions.
So are we out of the woods? No: there are always wild cards, including the possibility of another terrorism act or a cataclysm in the Middle East. But fuel for a recovery is in the pipeline, such as the Fed’s 11 interest-rate cuts in 2001, with a 12th expected soon. It typically takes a year for rate cuts to affect the economy. This may not make for great expectations–but surely for good enough.
