(May 4) – “The money managers panicked. The people bought. That is the real story of the wild month that ends today. After the worst week in NASDAQ history ended two weeks ago, Wall Street braced for a wave of selling that did not arrive. Instead, there was a rebound,” writes Floyd Norris in today’s New York Times
“That has happened time and again in recent years. Just as market fundamentalists take heart from the collapse of highflying stocks and proclaim that value now matters, the fall ends. The bears are vanquished. If that pattern is repeating — as I believe it is — the most interesting question for investors is how they will be able to tell if the next plunge, whenever it comes, is the real thing or just another buying opportunity.
“The answer is: Check the dollar and the economy. One or both of them are likely to get into trouble before the stock market suffers a prolonged downturn.
“Why? Because professional money managers really don’t matter much in the current environment. They can move money from stock to stock, but they cannot stay out of stocks for very long. The pressures to be fully invested are too great. The managers may fear the Federal Reserve, which is more likely than ever to raise interest rates after the report yesterday that consumer spending is rising at the fastest rate since 1983. But their customers are not worried. The NASDAQ market fell yesterday morning because professional investors feared rising interest rates. But the amateurs were buying, and soon prices were up nicely.
“American investors are certain that stocks are the best long-term investment. That lesson, learned over many years, will not soon be unlearned.
“A recession would operate on many investors as margin calls operated on some during the NASDAQ swoon this month; it would force selling by people who needed to raise cash. The selling would be slow and prolonged, bringing a gradual market erosion rather than a crash. The stock market would follow the economy down.