america's raging bull market continued its astonishing run today. Dow Jones Industrial closed up 53 points today. In Chicago, stock index futures soared. "Money Pours Into Mutual Funds At Frantic Pace So Far in January" reads the headline in the Money & Investing section of today's Wall Street Journal.
A strong economy, low interest rates and good corporate earnings have boosted the market, but nothing explains its runaway nature more than the unprecedented embrace of mutual funds by ordinary Americans, led by the baby boomers. It is estimated that mutual funds now hold a staggering $3.5 trillion -- much of it intended to fund retirements, children's college educations and basic savings. Forgotten, it seems, is the fact that the stock market is a highly speculative means of building a nest egg.
Salon spoke with Joseph Nocera, senior editor at Fortune magazine and author of the 1994 book, "A Piece of the Action: How the Middle Class Joined the Money Class." Nocera is also the chief correspondent for tonight's PBS Frontline documentary, "Betting on the Market," which looks at how middle- class baby boomers have been seduced by the stock market and the implications that has for the country.
How different is this bull market from bull markets of the past? Is it really without precedent?
It's going up more than any bull market in history. And you could argue that it's going up because so many people are participating in it. What's turned this from a rising market to a jet-propelled market is the fact that every month 20, 30, 40 million dollars from 401(k) plans move into equity funds, money that is put to work in the stock market.
And Americans seem to have forgotten that the market can crash. They are not wary of investing in stocks like they used to be.
That's why this money is coming in. It's because we members of the middle class now believe in it; we think it's a necessary component of our lives and that without it, we'll never be able to have a decent retirement. Now, every morning (NPR newscaster) Carl Castle tells you what the Japanese stock market did the night before. Can you imagine middle-class Americans caring about that ten or 15 years ago? That's an astonishing thing.
What caused the change?
What drove us into the market originally was not the fact that it was going up. It was the fact that our habits changed during the high inflation period of the late 1970s and early 1980s. You had to get your money out of the bank. You had to do something different with your money. The old ways didn't work anymore.
So that period may be as defining a moment for the baby boom generation as the Depression was for their parents?
Yes, I really believe that. That's how the bull market started. You had all these people moving their money from the banks to money market funds. These funds were getting 15, 16, 17 percent on their money at the height of the inflation. Then all of a sudden, let's say you've got your money in the Fidelity money market fund, you get this flyer in the mail that says, "Hey, we got this guy named Peter Lynch. He's been up 50 percent the last three years. You might want to try that." The market begins to ratchet up and up and up, people are making money, having fun and begin to think that they have some kind of God-given right to double-digit returns.
Then came "Black Monday," the crash of 1987, which didn't seem to change things.
Because nothing bad happened. The market took a 500-point hit but got it all back in 15 months. The people who wound up feeling foolish were the people who bailed out. Let me tell a story that's not in the Frontline show. It's really interesting, and it showed me how much things had changed: On the day of the '87 crash, I spent the whole day at Fidelity. The place was just chaos. At one point this guy came in with splotches of paint all over him. He was a house painter, and he was on his lunch hour. He came in and he looked at the stock market and he said, "Holy shit! Look at IBM!" which had tumbled from 175 to 106. And he said, "I'll never get another chance to buy IBM that cheap again." Instead of bailing out, he called his broker to buy shares of IBM. That's when I thought, "whoa, this is different. Something big is going on here."
Something big which seems to have become a mania, with over $3 trillion invested in mutual funds. How dangerous is this mania ? How much farther can the market rise before there's a major correction?
If I knew the answer to that, I wouldn't be doing TV documentaries. In the short term, it's probably not that dangerous -- by which, I mean in the next year or so, at least. Here's the real danger: If it's true that the influx of middle-class money is what's pushing the market up, then what happens when the baby boomers retire and they start to draw down that money? I think the thing to really worry about is the enormous effect that we baby boomers are having on this market and the enormous effect that our need for money will have on the market down the road. The key here is that baby boomers so overwhelm every other demographic that when they start pulling money out of the stock market, there is no way the Gen-Xers are going to be able to hold it up in the same way. It's just not a possibility.
When does the baby boom stop investing and start drawing down their money?
We're talking about a 10 to 15 year window. But then, of course, if everybody figures this out at the same time and pulls their money out five years from now, then it will happen much sooner. I want to emphasize that this is not a proven theory; there's certainly a possibility that we could have a bear market before that, and there's also the possibility that the market could keep going up after we pull our money out, if the conditions are exactly right, with earnings and interest rates, and so forth.
What do you think of the proposal to put Social Security funds into the stock market? Could that provide the injection of investment dollars to keep this bull market going?
I saw something on the Internet that said something like, "Boy, if you think it's great now when middle-class people are throwing billions into the market, just wait till social Security gets in there and throws trillions in the market." That's exactly the kind of attitude that I think represents the pride that cometh before a fall. It exemplifies hubris, and the market punishes hubris. But the most important thing is this: If there is a bear market of any duration -- and someday there will be -- and we have a lot of money in Social Security tied up in the stock market, there would be hell to pay politically. There would be congressional hearings asking, "What idiot started this?" Because if there's one thing that Social Security can't afford to do, it's lose principle. It's a huge danger. I do worry about the tail wagging the dog, with the political process winding up contorted to ensure that markets don't go down.
What would you advise someone who wants to invest in the market, or who is already invested?
My own money is invested in the stock market. I basically feel that you have to be there, that you just have no choice, given the world we live in. My basic advice is to remind people that investing is not easy. I know that sounds basic, but I think it's really hard for people in a bull market not to get caught up in chasing the hot stock, the hot fund or the hot tip -- in other words, doing the sorts of things that will cost them money, even in a bull market.
So my main advice is: The grass isn't always greener. Stick to your knitting; do what you know. Don't throw all of your savings in some hot aggressive fund. Be smart about this. Don't speculate with all your money. Keep it even-keeled. Have some stuff invested very aggressively, but have more invested very conservatively. And don't look at your conservative investments and roll your eyes and say, "Oh my God, it's not making that much money." The whole point of conservative investment is that when the market goes down, that stuff goes down a whole lot less. It's your safety net.
Turning on the IRA
More people are lifting the telephone. They are voting with their fingers. They've prevented quite a lot of nasty incidents. There is a tide running against the terrorists.
An official in the Northern Ireland Office, on the upsurge of Catholics in Belfast informing the police about IRA activities. (From: "IRA Admits That More Catholics in Belfast Are Informing on Them," in Tuesday's New York Times)