Investment: Don't panic! It's not all over
Wednesday 29 September 1999
The questions are always the same every time the stock markets have a bad run and lose ground for more than a few days at a time. It is striking how it is only when markets are falling that these questions become so insistent. Nobody bothers to ring up or e-mail their worries when the markets have a good run for more than a few days in succession.
Just as striking is the seemingly inexhaustible search for a single explanation of what causes market setbacks. The finger in the stock markets last week was firmly pointed at a senior Microsoft executive who dared to venture the opinionthat valuations of technology stocks were "absurd". Reports of this opinion, it was said, accelerated another bout of selling of wonder Internet stocks on Wall Street.
Net stocks have been looking sickly for several weeks now, as the price of Freeserve in London demonstrates, but this, we were told, was "the straw that broke the camel's back", bringing the rest of the market down in its wake.
The whole idea is nonsense of course, just as it was the last time someone put the skids under the market with such an implausible one-shot explanation. It is as self-evident as anything can be that Internet stocks as a group are grossly overvalued. I know no genuine professional, inside or outside the City, who seriously thinks otherwise. Those who seek to justify them have had to invent new valuation methods to justify share prices that cannot be justified in any other way. That is a real issue. But just because somebody in the industry concerned happens to repeat what everyone in the business already knows, but chooses not to say, cannot itself be a reason for the markets to decline.
But the travails of the Internet stocks are only part of a broader and more complex story. The squeals of pain coming out of this particular segment of the market are mostly coming from the brokers and investment bankers who are trying to bring new Internet issues or funds to the market. They hope to cash in on the Net investment fad before it finally comes crashing to the ground, as it will in time, just as railroads and electronic stocks did in years gone by.
Only last week we saw the launch of a Net stock fund from the mighty Merrill Lynch, America's largest stockbroking firm, and there are lots of others either out or coming from fund managers in this country. As with most such spates of new issues, my advice is: ignore them like the plague. The chances are that you will be able to buy most of them more cheaply within a year or so.
For a long time, it puzzled me why market setbacks like last week's are so quickly elevated to the level of crises, at least in the media and the City's most talkative drinking holes. I am indebted to John Carrington, a splendidly robust fund manager of the old school, now retired, for the insight that the current level of the stock market is a marginal price - which, in the very short term, reflects only how well or how badly the most directly affected professionals are faring.
More often than not, when markets fall, those who squeal first are those who have been caught out investing on margin (i.e. with borrowed money). But it can also be when the promoters of new issues are caught with a lot of suddenly unfashionable property on their hands. What is more disturbing is how rapidly a contagion of gloom in the trading world seems to spread itself so quickly to many private investors, whose only source of information about the market is what they read in the papers, or see on the television, and who possibly believe that the market's movements can be explained in such a naive (and excitable) fashion. They are long-term investors with short-term anxiety thresholds.
Mostly, stories of the Microsoft executive kind are pretty harmless - unless you are one of those who allow suchchatter to get you too worried for your own good, with the result that you change your behaviour and do something stupid and panicky as a result.
There are plenty of genuinely good reasons to be worried about the stock market at the moment, but the crises that genuinely matter to investors do not, by and large, come out of a clear blue sky, but are the result of long-standing problems which in retrospect are obvious to everyone, but which at the time get lost in the excitement of more appealing but transitory phenomena.
My chart demonstrates one of the most obvious problems, which is the overvaluation of Wall Street, as measured by the so-called Greenspan valuation model - a simple model that the chairman of the Federal Reserve looks at when considering his next monetary move. It shows that the market has until recently been overvalued by as much as 40 per cent - more than in the run up to the 1987 crash. The model is calculated daily by Ed Yardeni, a prominent Wall Street economist.
At a macro-economic level, the big questions include what is going to happen to the dollar/yen exchange rate, and whether the recovery in Japan and other Far Eastern economies will be sustained. Differences between the Japanese government and the Bank of Japan over monetary policy were the biggest genuine concerns exercising professional investors last week. For the United States and the United Kingdom, interest rates are also a genuine concern.
For what it is worth, my view is that the markets are not yet ready to take a serious tumble of the kind that has long been predicted by the gloomier pundits, and that we will in due course see another decent rally. Against that, however, as I pointed out earlier this year, the global trend towards higher interest rates is not an encouraging backcloth for thinking that current valuations can survive indefinitely, and the technical charts for both markets are beginning to look very ragged.
My point, however, is that none of these concerns are particularly new. If you have not already taken some precautions as an investor against a return of Wall Street and (less so) the London market to more normal and sustainable levels at some point, then it is hard to see what will now persuade you to do so.
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