The April dip was for fools. Were you one of them? If so, you had plenty of company. For most of a decade, investors have enriched themselves by plowing money into the market every time it stumbled. Whatever the downward catalyst, from Yeltsin's coup to the Asian flu, prices routinely rebounded.
But that behavior defied a bedrock principle that the market makes most people look silly most of the time, a principle that quietly resurfaced last spring in the form of a dotcom massacre and today presses squarely in the face of eternal bulls. As has been fairly obvious for most of human history, not all market pullbacks are buying opportunities.
We may be getting close to a blue-light special now. Maybe. Remember, though, that bargain hunting around the March-May sell-off rewarded only a few while ravaging many. Electric utilities, oil and some financial and left-for-dead health-care stocks have done well. But that's not where the money was. Popular techland has been a disaster. Last week the NASDAQ yo-yo busted its string and fell to a new low for the year, extending a slump in the most speculative stocks and grounding the likes of Intel, Dell, Cisco and Lucent.
Some brokerages were poised to send out margin calls early this week, though a rally Friday may have provided a reprieve. Many investors, it seems, became so convinced that prices were cheap last spring that they doubled up, partly with borrowed money. Now lots of stocks are even cheaper. The NASDAQ bottomed at 3165 on May 23, suckered in a wave of new money with a 1,000-point rally, then collapsed in stunning fashion--closing as low as 3075 on Thursday. From the March 10 peak of 5049, the index dropped 39%. In the 17 trading days ending Friday, the NASDAQ closed lower a numbing 14 times.
Those numbers only begin to address the carnage. The average NASDAQ stock is down 48%, more even than during the 1987 crash, reports Salomon Smith Barney. Thanks to relative strength in more conservative stocks, broader market measures haven't been as devastated. Still, the Standard & Poor's 500 hit a new low Thursday, bringing its decline to 13%, and the Dow, while still above its spring low, was off 14% from its high nine months ago.
Such declines skirt the boundaries of an official bear market, commonly defined as a drop of 20% or more. But for most investors, this is indeed a bear. In their next statement, millions of 401(k) and mutual-fund investors will see net-investment losses and possibly a lower balance for the second consecutive quarter.
The investing backdrop hasn't been this frightening since 1990. An eroding wealth effect could hurt consumer confidence, while a surging dollar is taking a bite out of the earnings of U.S. multinationals. Among companies sending up earnings flags: Home Depot, Yahoo, Lucent, Intel, Kodak, Dell and DuPont. Meanwhile, renewed hostilities in the Middle East are pushing oil prices higher, threatening to stoke inflation.