No permanent plateau

Prior to the substantial U.S. stock market tumbles last year, certain amateur pundits and armchair economists predicted that U.S. equity markets would keep chugging along, unabated. The belief was that the masses would somehow save the market.

Joe Six-pack and his fellow commoners (hoi polloi), we were told, would keep the market on track by regularly taking advantage of various equity-based tax shelters. In other words, they would keep investing in their 401(k) plans and individual retirement accounts ((IRAs) through thick and thin, no matter how the market behaves.

In the roaring bull market of the 1990s, virtually every market decline was regarded as a potential buying opportunity. Virtually every market decline was regarded as “short-term” and “temporary”–as a momentary blip signaling a promising buying opportunity. The market would keep going up, it was believed.

The amateur pundits claimed that the U.S. stock market has finally been stabilized by the “democratization of capital.” Now that the little guy, the small investor, could get in on the equity action, they reasoned, the market would be less prone to artificial manipulation (yes, as opposed to “natural manipulation”).

Small investors would not speculate excessively. Small investors would not be prone to sudden panics. Capital-flow- distorting tax laws would ensure that small investors were committed to regular investment programs.

The stock market would never go down in a substantial, catastrophic way, went the theory. With the passage of time, as more small investors participated in the stock market action, the market would be less prone to wild price swings. Capital-distorting tax shelters (including reduced capital gains taxation) would continue to attract new money and keep equity prices firm. So went the theory.

Here’s the reality: The market is still subject to substantial (yes, even wild) price swings. Last year, a great deal of people lost a great deal of money, particularly in the once high-flying technology sector. The Standard and Poor’s 500 benchmark index ended the year 2000 in negative territory, as did the tech-laden Nasdaq and the Blue-chip-oriented Dow Jones Industrial Average. Despite the alleged tax-induced distortions, Y2K was generally a bad year for investors, big and small alike.

Many small investors may invest regularly, but they are still entrusting a good chunk of their money with professional money managers–through mutual and pension funds alike. These professional money managers still react to interest rate changes. They still react to a listed company’s reported earnings shortfall. They are still driven by their modern portfolio theories–as well as by proverbial fear and greed.

The amateur pundits are wrong. In regards to the stock market, U.S. or otherwise, nothing fundamental has changed. There is still no permanent plateau–and there never will be.

Strictly a personal view. Charles Reyes Jr. is a regular columnist of Saipan Tribune. Mr. Reyes may be reached at charlesraves@hotmail.com