Is it time to capitulate?
That's the Wall Street term for total surrender, the point when investors stampede to the phones to scream "Sell!"
Despite the long decline since the major indexes peaked early last year, investors have not capitulated. Not yet. In fact, money is rushing into stock funds, according to the Investment Company Institute, the fund's trade organization.
But now things are looking especially grim.
The Nasdaq closed Monday at 1,923.38, off 62 percent from its March 10, 2000, peak. All the stupendous gains of 1999, when that index rose 86 percent, have been lost.
Meanwhile, the Dow down 436.37 Monday is off 13 percent from its Jan. 14, 2000, high, and the Standard & Poor's 500 is 23 percent below the high it set March 24, 2000.
A point may come when investors do give up en masse, issuing a blizzard of sell orders that drives prices down in a vicious cycle.
But why hasn't that happened already? Could the forces that have kept the decline from becoming a panic during the last 12 months continue to prevent a crash?
Investors haven't panicked because, I suspect, many feel they aren't losing real money. Many know that the stocks' stunning returns in the late '90s were irrational. In their hearts, they knew the piper would have to be paid.
So far, the piper is being paid with funny money with past gains investors know they had no right to expect in the first place. For many, the losses of the last year have yet to devour profits won earlier. Investors know they are richer than they would be if they had put their money into savings accounts or bonds.
After all, even with the last year's losses, annual returns for the last five years averaged about 14 percent for the Dow and S&P 500. Even the brutalized Nasdaq has a five-year average exceeding 10 percent.
Of course, if stocks keep going down, more and more investors will begin losing principal the money they invested originally rather than just the profits they made later. When that happens, an investor is more likely to panic and to sell to cut his losses.
Investors may seem calmer than expected because about half the money invested in mutual funds is in retirement accounts, such as IRAs and 401(k)s. Even though investors can move this money from stock funds to bond or money-market funds without penalty and without the tax bills such moves would trigger in ordinary accounts they tend to think of these accounts as long-term investments that should be left alone. Apparently, that's what they're doing.
Also, today's investors are better trained than those of earlier decades. Financial gurus, planners and the media have coached them to expect temporary downturns as part of the price of good long-term gains. In the late '90s, remember, we were admonished to "buy on the dips!"
Though the current dip is worse than the kind of short-term pullback that this strategy envisioned, many investors especially baby boomers in their peak earning years may not be focusing exclusively on the decline of their older investments. Instead, they may be looking at the low prices at which their regular monthly contributions are buying stock funds today.
If you wished you had put more into the market at 1998's prices, now is your chance.
Investors who probe inside the broad market indicators also know that the last year's decline is really a story of the burst bubble in tech stocks, while many other types of stocks have held up quite well.
Obviously, this is why the tech-laden Nasdaq has collapsed. But a close look at the Dow and S&P 500 reveals that tech stocks are the prime culprits there, too. Technology stocks were added to both those indicators over the last few years in an effort to update them or, as some critics said, to supercharge returns. Now those membership changes have come back to haunt us.
Should investors be bailing out of stocks now?
Well, bail out and do what? Sit on the sidelines?
It would be self-defeating to sell your stocks and stock funds at today's prices, then wait to get back in until after the market proves itself by going higher than today's levels. By selling low and buying high, you'd be doing things backward.
You might plan on selling now and then buying after prices go even lower. But, of course, we don't know that prices are going lower, and small investors have never been very good at this kind of market timing; even pros aren't.
This may be a time, then, when it doesn't pay to think about it too much. Stocks are long-term investments. Perhaps it's only prudent to redefine "long term" to mean something closer to 10 years than five years. If you don't need your money for 10 years, keep it in stocks. If you need it in five, put most in bonds and CDs. If you need it in five to 10 years, divide it.
After all, though the economy is slowing, it's hardly a disaster. Interest rates are low. Inflation is low. Unemployment is low. The government is running an enormous surplus. We're at peace. Productivity keeps rising. Astonishing new technologies are arriving all the time.
My money says that 10 years from now, stocks will have long since recovered from this bear market and gone on to set a string of new records.
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