Nowhere To Invest

WHEN LAWSON BROWN SET OUT to reinvest his family’s $70,000 nest egg a few months ago, the Minneapolis, Minnesota, probation officer found his options limited. Brown, 39, considered mutual funds to be “unexciting.” Certificates of deposit? “Get real,” he says. “Not with bank rates of 3%.” Bonds? “Same problem.” The only alternative, he says, was the stock market. He took the plunge, scoring short-term gains in high-tech stocks and banking issues, which lulled him into a sense of security. Now he and other investors are getting a loud wake-up call from the market’s bumpy decline in the past few weeks, which has raised fears of a major correction ahead. But Brown is not fleeing just yet. Asks he: “Where else can you go?”

Brown is not alone, and his question helps explain why the stock market has so far managed to avoid a crash despite enduring such woes as a weak economy and global currency turmoil. With interest rates at their lowest levels in decades, stocks have been practically the only game in town. Small investors by the millions have deserted certificates of deposit and money-market funds in favor of the higher potential returns on equities. Since 1990, individuals have shifted an estimated $100 billion out of stingy bank CDs into the stock market. More than a quarter of the $120 billion they invested in mutual funds during that period has also ended up in the market. The sudden inflow helped propel the Dow Jones average to new heights last May, when it broke the 3400 barrier for the first time. By propping up the market with their new money, investors like Brown may have prevented or postponed the steep correction that analysts think is probably inevitable.

Lately the market’s spasms of insecurity have grown more profound. In a stampede of selling last Monday, the Dow dropped more than 100 points by noon, only to bounce back to a modest 22-point decline for the day. The Dow finished the week down 64 points, at 3136.58, a 240-point decline since mid-September. Many analysts attribute the pessimism to a host of misgivings, including uncertainties about the outcome of the presidential election. Most worrisome has been the prospect of an extremely sluggish economic recovery and the apparent decision by the Federal Reserve Board not to cut interest rates any further. “The market is suffering from a bad case of high anxiety due to all the uncertainty,” says Donald Straszheim, chief economist at Merrill Lynch. “After all,” he quips, “it’s October.”

His remark is only half in jest. In a business that thrives on mystery and superstition, Wall Street has good reason to be wary of this particular month. Six of its nine biggest one-day declines occurred during October, including Black Monday in 1929 and the Roaring Eighties crash of 1987. The last major collapse, the minicrash of 1989, also took place in October. While some traders suspect goblins, others blame more mundane forces. One is the so- called calendar effect, which is the result of October being the month when many corporations revise summertime earnings forecasts. Often those projections turn out to have been too rosy, forcing companies to cut estimates.

Some analysts, dwelling on the fundamentals rather than superstition, think the epic bull market that began in 1982 has finally entered a long season of bearishness because of the likelihood of very slow economic growth in the 1990s. “We’re going through another market crash right now,” contends Albert Sindlinger, who heads the consumer-research firm that bears his name. “But instead of suddenly falling off the cliff, it’s collapsing over a period of time.”

Investors worry about the election, apparently fearing both candidates in roughly equal measures rather than showing Wall Street’s usual preference for a Republican. Analysts see Clinton’s program as potentially inflationary, while they consider Bush’s to be stifling in its sameness. To differing degrees, both candidates have proposed more spending and incentives for infrastructure and technology, which has boosted some stocks in those categories. But the overall market will probably stay in a holding pattern until Nov. 3, says Roger Servison, retail-group president at Fidelity Investments. Says he: “There’s a lot of pent-up demand building out there.”

During the anxious pre-election gyrations, though, analysts recommend that investors stay put — either in the market or out of it. Small investors, says John Markese, president of the American Association of Individual Investors, “should close their eyes and wait it out.” Many individuals have fled to the relative safety of diversified mutual funds, such as Fidelity’s Asset Manager, which spreads out risk by investing in a mix of stocks, bonds and money-market instruments.

By not panicking in reaction to sudden downdrafts, stockholders have avoided the kind of rush for the exits that can result in a major crash. After the election, the decisive struggle will be waged on Wall Street. It will be the oldest fight of all: the battle between bull and bear to determine the direction of the stock market during the next four years.