If you have learned nothing else about investingin the past few years, I hope you know thatinvesting is all about mob psychology. In 1999and 2000, everyone wanted into the "big easy"stock market. All you had to do was buy somethingand watch it double in a month, if it didn't double ina week. Everyone clambered aboard and thought theycould invest without help just by logging online andhanging out in investment chat rooms. Then fromMarch 2000 until July 2002, the evolving view as themarkets headed sharply lower was first to "hang onfor a better day" and then to "run for the hills."
Negativity and Optimism
As the indexes bottomed in October 2002,investor sentiment was very hostile toward equities.Nobody wanted to own stocks at the very momentwhen they were at their most dramatic bargain-basementprices. Last March 2003, as we headed off towar in Iraq, everyone wanted the safety of bonds atexactly the wrong moment, because that's what themutual fund and brokerage firms were pushing intheir ads. People are scared, so give them what theywant—safety with a capital "S." There's nothing newin any of this account. The crowd is always wrong.Even though it is always more comfortable to act withthe consensus, you make more money when you runcounter to the common wisdom.
While this year began in a wave of optimism, thestrong gains of January faded quickly in the absenceof improvement in the employment statistics.Everyone knows people who have lost their jobs andbeen unable to find work, or who have kids who graduatedfrom college in the past 2 to 5 years and havebeen unable to find jobs related to their studies. As thefirst quarter concluded, there were no stock gains towrite about in any of the major indexes, so those whoowned index funds made no substantial investmentprogress during the first quarter.
However, many investment advisors did showgains during this period, even after subtracting theirfees, showing that active management of portfolios islikely to be the way to go in 2004. When a rising tideis not lifting all boats, you need the care and assistanceof a portfolio manager with excellent stockpickingskills to sift and winnow winning ideas.
Employment and Industry
Throughout the first quarter, corporate earningshave largely been okay. Not only did companies reporthigher earnings per share, but revenues finally startedto increase as well. Analysts have kept a sharp eye tosee if better earnings were just the result of drastic costcutting or if the sales line on the income statement wasstarting to show improvement as well.
The number of preannouncements of bad resultshas been very tame compared to what we had come toexpect in the dire downturn. More companies reportedearnings at the high end of expectations or exceededthem, particularly if they were not in the tech sector.
The dollar had a tough time during the quarter, butseems for now to have peaked near $1.30 against the euroand has started to head lower recently. Sadly, the bombingin Madrid may have abruptly alerted Europe to thereality that terrorism is now a global problem. Hopefully,that horrible event has also provided an opening for athaw in US relations with Europe that had become sobadly stressed since the start of the war in Iraq.
The employment picture has definitely brightened.Help-wanted advertising is rising ever so slightly. Thecontinuing numbers of people receiving unemploymentchecks has begun to decline. At the end ofMarch, new employment numbers also showed stronggains after several weeks of very paltry improvement.Retailers and restaurateurs are enjoying more businessas consumers feel more comfortable about spending.
Wall Street Journal
The oil picture is much less cheery at the moment.Gasoline prices are near record highs, which is a realproblem for people who have to drive long distances toget to work. A recent story highlighteda gentleman with a large SUV who drove up tothe pump and was unable to fill his tank for $75. Pricesin California have routinely surpassed $2 per gallonand the national average in mid-April was $1.77. Theseare problematic numbers because they are a punitivetax on people who live on a tight budget. Dollars theymust use for gas are taken away from other discretionarypurchases they might otherwise make.
In the meantime, the market has spent the firstquarter consolidating the vigorous gains it made in2003. That is normal and healthy. No market goesstraight up without catching its breath. The talkingheads on television are very alarmist in their conversation,which is undermining confidence.
Remember that we have just endured a once-in-a-generationpurge of investment excesses. The last onelasted 2 years, 1973 through 1974. This latest oneoccurred 27 years later and lasted 3 years, 2000through 2002. No wonder people are afraid. Fear ishealthy in investing. It is a constant reminder thatstocks go down as well as up, and that investing is onething and speculating is another.
Economic numbers are definitely strengthening.Corporate earnings are improving. However, expectationsare not robust. That's a good environment forsteady improvement as 2004 unfolds. If you watchwhat happens to bonds every time strong economicnumbers are reported, you know that the bond gameis over and a preference for bonds over stocks is akinto skating on ice.
Joan E. Lappin is the chairman and chief investmentofficer of Gramercy Capital ManagementCorp, a NYC-based registered investment advisor.Gramercy develops personally managedportfolios tailored to your investment goals.Ms. Lappin appeared in the year-end issue ofBusinessWeek on "How to Invest in 2004." Shewelcomes questions or comments at 212-935-6909.