Here’s an excerpt from a column written by Eric Savitz in the October 14, 2002 issue of Barron’s. Anyone who is interested in studying market sentiment should go back and read Barron’s (or any mainstream financial publication) at major turning points. (This is part of my Remembering the Bottom of the Bear Market series of posts.)
Have you opened your third-quarter statements yet? Well, I’ve opened mine, and as Warren Zevon said, it ain’t that pretty at all. Makes me want to hurl myself against the wall. Makes me wonder why I didn’t sell three years ago. More importantly, it makes me wonder if I ought to sell now.
It’s the possibility that people like me might answer in the affirmative that has Jim Bianco worried. Bianco, proprietor of Chicago-based Bianco Research, observes that investors in equity mutual funds, measured since the bottom of the last bear market in 1990, have now had their collective profits completely eroded away. In other words, if you consider all the money that’s been invested in stock funds over the last 12 years, the combined return now amounts to a big fat goose egg. The same return available from a nice, comfy mattress.
The result, Bianco says, is that individual investors now face their “most important decision since the bear market began” in March 2000. “Do they sell and ‘cut their losses’,” he asks, “or continue to hold and ‘believe’ in the market?”
Bianco points out that for the last two months, equity funds have had outflows on a rolling 12-month basis for the first time since 1989. “The mutual-fund flow data suggests that investors are only now acting as if the profits from the 1990s bull market have been wiped out,” he wrote in a report last week.
If stock prices don’t bottom soon, Bianco warns, the risks will only increase. “If stocks continue to decline, it isn’t just ‘more of the same,’ as the public will have to decide if they believe in the stock market enough to take these losses. As history has shown, the public sells when their break-even point is reached.”
That, of course, would be unfortunate for the beleaguered equity markets. “I really think this is nasty and getting nastier as we speak,” Bianco said in an interview. “The financial markets are worried that something big is brewing out there,” citing in particular fears of a liquidity crisis involving a large bank with significant derivatives exposure, like J.P. Morgan Chase or Commerzbank.
The market’s best hope, he says, is for stocks to make a definitive bottom in October. “The situation is getting extreme — and part of that is the public is now out of profits. And historically, this is when they hit the sell button.”
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