Riding the bull, bashing the bear
by Becky Gillette
Published: May 1,2000
Most Mississippi investors haven’t been unduly surprised or overly concerned about the recent declines in the stock market.
“Quiet,” describes the reaction of most investors, said Doug McDaniel, president of Executive Financial Planners Inc., or EFP, in Jackson. “Fortunately, they seem to be taking a long-term approach. People who have money in the market need to have a long-term approach.”
On April 14 a bad week turned into a terrible Friday when the stocks, particularly NASDAQ stocks, dropped significantly. Stocks have been up and down since then.
McDaniel said he had only a few calls the Friday stocks dropped off so heavily.
“We had just a handful of calls from a base of 600 to 700 clients,” McDaniel said. “We told them that, basically, the market declines about 15% to 20% every three years. A 15% to 20% correction is a normal correction. If we were to see that kind of decline, we would consider it normal particularly in light of the fact that the S&P 500 just completed its fifth year in a row with over a 20% gain.”
He pointed out that NASDAQ, which had the steepest percentage drop, was up more than 80% in 1999. In light of that, a 20% to 30% correction is not significant.
“You have to keep it in perspective,” said McDaniel. “When you have that kind of huge increase, it is not uncommon to get a pullback. A decline is healthy. It tends to remove some of the speculative excesses which have appeared in the market. We do caution investors not to sell into a correction. It rarely pays to do that.”
One reason for lack of concern by clients is that most are diversified in both large and small company stocks, value and growth stocks and international stocks. McDaniel says that helps protect investors from possible corrections. He doesn’t recommend clients invest heavily in technology/NASDAQ stocks because a decline in that volatile market could cause a big loss in their portfolio.
McDaniel said the type of increase seen in 1999 in the NASDAQ is unsustainable. Many Internet stocks with no earnings rose substantially higher than stocks with strong earnings, which is the opposite of what would be expected. But ultimately earnings drive stock prices, so the type of stock price increases seen in the NASDAQ in 1999 probably won’t be repeated.
McDaniel said his company remains optimistic about the economy, and suggests clients use market pullbacks as an opportunities to add to their portfolio.
Ashby Foote, president of Vector Money Management, also said that most of their investors were not overly concerned with the market correction.
“I think they were not at the vortex of the market downtrend because they, with few exceptions, have less exposure to the new economy,” Foote said. “That is really where the brunt of the damage was done. The two companies in Mississippi that could qualify as new economy stocks — technology stocks — are Tritel and WorldCom. Both of those, while they fell off some, have done very much better than a lot of the dot.com type stocks that really got hit the hardest. I’m not aware of any Mississippi companies that really got hit hard.”
Foote said often in situations like this, there tends to be more panic on the part of institutional investors than individuals.
A lot of the decline was attributed to a higher-than-expected blip on the Consumers Price Index data. But Foote said other inflation indicators such as long-term treasury bonds rates and the price of gold portend continued low inflation. He believes that bodes well for the future.
Stacey Wall, president and CEO of Pinnacle Trust, said that while the market has been volatile lately, the market has been good for so long that most investors see dips as the market as buying opportunities.
“So, I don’t see nearly as much concern as I saw 10 or 15 years ago,” Wall said. “I think there were sectors of the market, particularly technology stocks, that had gotten out of hand. We were overdue for some sort of correction. And I do think that long term that will be good for stocks on the whole.
“I don’t think the weakness is completely over with yet. I think we’ll see some more selling off and will probably test the lows we set a couple of weeks back. I do think that for investors who have cash now, it is not a bad time to try to a little bit of bottom fishing. But I wouldn’t get overly aggressive at this point.”
Wall believes the craze in Internet stocks has been overzealous, indicating that people should steer away from “all flash and no earnings” Internet companies that are two to four years away from making money, if at all.
“It is still a little too early to get aggressive with them,” Wall said. “I would want a little more evidence that this bottoming out process is more complete than we have seen so far.”
Contact MBJ staff writer Becky Gillette at email@example.com or (228) 872-3457.
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