Stocks worldwide declined this week for reasons that exceed real economic losses and the usual flagellants of fear and regret. Once celebrated, now despised, they are being cast out by investors due to sheer uncertainty. Why own a share of
, sellers wonder, when the future of both its business and the country are so unknown? You can hear the murmur across the land: Frankly, my dear, I'd rather have cash.
Yet the country and stock market have certainly faced similar moments and lived to tell the tale. The Cuban missile crisis and the John F. Kennedy assassination come to mind, since in each case it was believed, like now, that evil and mysterious madmen were bent on destroying America.
I'm not going to say that all will be well this time -- no one can offer that guarantee. But I can take refuge in historical precedent and do a little math. And if my noodling makes you feel better, when you're ready to come out of your emotional bunker and bravely invest in some U.S. companies, I'll offer some stock ideas too.
Many people are wondering how far the
can fall -- and in what time frame. At its current rate of decline from its 2000 high, the Nasdaq will hit 500 in June 2003.
I settled on this forecast by determining the average weekly rate of decline from the index's all-time peak, which is -1.3% per week since March 2000, and projecting it forward at an equal rate. It's only math, it's rank speculation -- and it really can't happen unless the unthinkable transpires over the next couple of months or years. But just thinking about the notion of unending collapse makes you pause for a second and wonder exactly how far the indices can go before the fabled smart money -- people who have been there, done that and don't talk to the press -- start their bargain shopping for stocks in bulk.
My guess is that those smart folks, whoever they are, only step up to buy stocks with vigor every 10 to 15 years or so during cyclical swings of very extreme economic and market panic -- and spend the rest of their time at their waterfront and mountain homes attending to their horses, roses and golf games.
If so, then it makes sense to look at very long-term moving averages, or trend lines, of the big indices and see where those smart folks might have bought shares in the past. The length of the moving average isn't as important as the fact that it should barely encompass all or most of the worst declines of the past 20 years. That is, you would like to imagine that our hypothetical Mr. and Mrs. Supersmart put down their 3-woods long enough to buy stocks at all of the major lows in the market, and at no other time.
For the Nasdaq Composite, it's useful now to look at the 10-year moving average in this context. As shown in the nearby chart, it easily contains the big 1998 and 1994 declines, and just barely holds the Gulf War-impelled decline of 1990, as well. The good news for the moment: The Nasdaq Composite on Tuesday just about hit its 10-year moving average of 1560 on the button before coming to a rest.
This means, people who have at least a 10-year hold horizon will buy at the current level. That doesn't mean these people buy only every 10 years. But it does mean that the last few times that the Nasdaq Composite was at a comparable level relative to its past 10 years of history, these people had probably begun to buy heavily even if they anticipated that the final turnaround in stock prices and the economy was still sometime in the future. Don't forget that they bought on both sides of the absolute average price, so they'd theoretically be buying even as it cascades down from here.
If this level fails -- as the five-year moving average certainly did at Nasdaq 2231 -- then you could surmise that the next line in the sand trap would be the 15-year moving average at 1178.
While that level might seem hysterically low, it is humbling to keep in mind that people who bought the Nasdaq Composite at its low after the 1987 market crash did so at 323. That's not a typo -- the index was no bigger than an area code then. After three years of upward struggle, the composite fell back to the same level in October 1990 as recession and Gulf War hostilities intensified. Thus, the seemingly bankrupt state of the Nasdaq today is still five times higher than the worst level hit in the past 15 years. I chose to spotlight Nasdaq 500 at the start of this section because that was considered a fabulous new peak at the end of the Persian Gulf War.
Should the Nasdaq be five times higher than its lowest level of the decade? Maybe, maybe not, depending on your point of view.
Even the hairiest bear can't deny that four of the five horsemen of the Nasdaq ---
, Cisco Systems,
-- didn't begin to grow as companies or stocks until around 1991. Since then, they've revolutionized business and created about $525 billion in shareholder value from ideas, conviction and sweat. The world's shareholders are at least five times richer as a result of their efforts.
Let's look at that October 1990 Nasdaq level, 323, a different way. What if the Nasdaq had only grown at 6% annually from October 1990 until now? That's the historic average of equity advancement in the 20th century if you don't add in dividends. The answer is that the Nasdaq would be at around 649 today instead of 1555.
Now what if you contend that the computer-related advancements of the 1990s were so much cooler than anything that happened in prior history -- including automobiles, airplanes and electricity -- that investors should be granted a rate double the historic norm, or 12%? You still only get a Nasdaq at 1190, which is about the same as the 15-year moving average. Thus, while it's fair for bulls to argue that 1560 is a reasonable level for the Nasdaq, it's also easy to see that the index could decline another 400 points and still stay within the high side of its historic norm.
I have mixed feelings about which scenario is likely to transpire. On the one hand, I note that investors are still affording a premium price-to-earnings ratio to stocks like Cisco,
that are simply not growing fast, if at all, and probably won't for at least another six months to one year. These stocks do not appear to deserve their premiums and could get cut in half again from their already depressed levels. Now add falling consumer confidence and the resulting ruin that brings to retail, leisure and services stocks.
On the other hand, I can see that the Nasdaq's 10-year moving average seems fairly sturdy; mutual funds' tax-loss selling seems complete; the Fed's eight rate cuts should start improving the economy soon; and the "fear factor" CBOE Volatility Index reached a level on Tuesday -- around 46 -- that has signaled the start of powerful counter-trend rallies in the past (though it has gone as high as 60 in 1998 and probably will again).
My guess is that bears will probably stand aside soon and let a modest reversal transpire; they tend to be more professional than bulls and don't get greedy after a tremendously profitable run. Yet I also would be aware that the rally will be short-lived because buyers won't have conviction until major technology companies definitively announce that orders from customers are back to levels that suggest growth, not maintenance of current levels. Until that happens, possibly as soon as early next year but potentially not until the second half of 2002, then the 10-year moving average of the Nasdaq might look like a ceiling rather than a floor.
You don't get to be Mr. and Mrs. Supersmart for nothing. It takes courage, substantial assets in real estate and cash as a cushion, and a very long-term horizon. But I think it's fair to bet that investors who buy demonstrably cheap, seasoned stocks into uncertainty with eyes wide open at some point this fall will be well positioned for many decades to come.
Picks For the Courageous
So what to buy, if you're so inclined? Whether you are making your own 10-year plan or you're a contrarian who likes to trade a little bit, it seems that the market is throwing a few fat pitches right now. Minneapolis hedge fund manager Bret Rekas, a bear who recommended shorting
at levels three times higher than current prices, says he finally sees a few bargains out there.
A reformed technology analyst who formerly worked at DLJ and Robertson Stephens, Rekas swears that "if you've bought real companies in technology at one times sales, you've typically made money." His top name:
. To be sure, he's not enamored with management, and the company has a lot of troubled business lines. But during most of its checkered history it has sold for at least 1.5 times sales, and it's fair to bet that it will trade back there again in the next year, offering the possibility of a 50% advance in price along the way. He's also interested in
, which currently isn't trading much above the value of its cash hoard.
At the time of publication, Jon Markman owned or controlled shares in the following equities mentioned in this column: Microsoft.