The proactive individual investor in America is deluged with ways to play the market. CNBC, the all- business cable channel that has become a fixture in suburban home- offices, is sponsored almost exclusively by discount trading services, mutual-fund solicitations and market information systems available via modem.
Now, when market-moving news crosses the broad-tape tickers on Wall Street's trading floors, it also flashes up in discount brokerage offices in Florida retirement communities and on the millions of home- computer screens linked to 'real- time' services with names such as Accutrade, Value Line and Signal.
Their impact is difficult to overstate. On Monday mornings, these services are usually backed up handling orders from weekend investors following up on tips published in Barron's, the punter's bible this side of the Atlantic. Last week, veteran mutual-fund manager Peter Lynch offered some unexpectedly favourable comments on a dozen companies. By 10 am, trading curbs had been imposed to slow the buying.
The big question is how mutual- fund investors, having acquired a taste for real-time speculating, will react if the recent slide in equity and bond prices turns into a prolonged rout. In the old days, small- time investors would have called their brokers in a panic, and been lectured about market corrections and advised 'to buy into weakness'. But now, with some pounds 1,500bn amassed in share and bond funds, and portfolio liquidation as easy as dialling an 800 number, will the individual investor be so easily ignored?
In the past, their sluggishness acted as a buffer against the effects of more nimble professional trading. In the 1987 crash, for example, only 2 per cent of mutual fund share assets were redeemed, and the fund's cash positions were sufficient to handle most redemptions. They weathered 1990, Mr Lynch says, when the US economy was falling into recession, the banking system was in deep trouble and a war was looming over the world's oil supply. And despite a 10 per cent decline in the Dow Jones average so far this year, they don't appear to be panicking now.
But there are very real fears about their reaction to 'spasms of downward volatility', in the words of economist Henry Kaufman, 'instead of the highly agreeable upside volatility to which most have grown accustomed'. Most of the money now sitting in the funds was not there in 1987, meaning the average mutual-fund investor has never experienced a prolonged bear market.
The one market that has felt the sting of the newly empowered citizen-investor is the trade in mortgage securities. American home- owners have responded to the chance to refinance their mortgages over the phone 'with an alacrity that has utterly confounded the statistical models', Dr Kaufman notes. As prepayments have surged, holders of CMOs (collateralised mortgage obligations) and other arcane derivatives who counted on household inertia have been badly burned.
Under similarly opportunistic circumstances a year into a long bear market, it is difficult to believe that mutual-fund investors - armed with up-to-the-minute share quotes and news about billion-dollar losses by George Soros in the derivatives market, or Venezuela's default on its Brady bonds - won't join in the big sell-off. 'It's one thing to philosophise about loss, and another thing to live with it,' as one fund adviser put it over the weekend.
Unlike the pension and insurance fund advisers which dominated markets in the past, mutual- fund managers have no room for manoeuvre. They cannot leverage their holdings to take advantage of temporary downturns, and they have no real alternative but to pass on net sales by their investors to the markets.
Some economists - such as Henry Kaufman, who is well- known on Wall Street and elsewhere as 'Dr Doom' - have gone so far as to suggest that mutual- fund volatility will eventually precipitate the next 'economic shock'. Complicating a collapse of confidence in mutual funds, he argues, would be its powerful impact on consumer spending. A sell-off in the markets would translate directly into a slump in everything from retail sales to 10-day car-sales figures.
In principle, an economic contraction triggered by a run on mutual funds could be countered, like any other, by easing monetary policy. But Dr Kaufman argues that the likely destination for the money leaving the funds - money funds and bank accounts - will make the Federal Reserve's task far more tricky.
'The time has come to consider the consequences for the global economy of a potential sudden sell- off of mutual fund shares,' Dr Kaufman says.
His solution would be to impose on mutual funds 'circuit breakers' such as those now employed by US stock exchanges to stretch out the effects of volatility. To drive home to investors that equity and bond funds are not to be considered close substitutes for bank deposits, they would be required to give 60 to 90 days' notice before selling shares in the funds.
The prospect of sitting on a rapidly shrinking investment for a weekend - let alone three agonising months - is not one welcome to people who spend a healthy amount of time and money on up- to-the-minute market reports and on the advice of 'market timers' who suggest hopping in and out of funds to avoid the unpleasantness of losses.
In the meantime, investors appear to be following the advice of Mr Lynch and other veterans: funds have experienced only two weeks of net outflows so far this year, despite all the gloom in the markets.
For the impatient armchair investor, it seems there is little alternative but to sit tight.
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