How did that old Reagan for President television ad go? Something like: "Some people say the bear doesn't exist. . . . But what if there is a bear?"
The ad was surely better-phrased than that, but it certainly did come to mind today as the stock market continued its downward slide, with the Dow tumbling nearly 300 points and the Nasdaq 65 points, or almost 5 percent. Coming on top of two straight days of selling and two weeks of incredible volatility, today's sell-off (which included a dramatic 150-point drop in the last 20 minutes of trading) seems to have given even the most bullish strategists second thoughts.
Watching the bulls scurry for cover has certainly been the most entertaining part of the past couple of days. (Actually, it's been the only entertaining part. Even if you think that stocks are incredibly overvalued, there's something troubling about watching them fall so far, so fast.) Ralph Acampora of Prudential Securities, one of the perma-bulls, went on CNBC yesterday and predicted that the Dow would break 10,000 by year-end, only to change his mind in the next 12 hours. This morning, Acampora sent a note to clients suggesting that the Dow could be in for a major correction, and late this afternoon again went on CNBC and made what he described as "a bear call." Acampora, who specializes in that brand of pseudo-science called technical analysis, hedged his bets, of course, saying that if the Dow ended the day below a certain point, then it would accelerate lower, while if it didn't, then it could rally to 10,000. But his call was definitive enough to spook investors who have been counting on utopian buying to make up for the exceedingly mediocre performance of corporate earnings in the last two quarters.
Actually, Acampora was very good-natured about everything, and seemed troubled by the amount of short-term authority that he is apparently able to wield. But listening to his explanation of why he had suddenly become bearish, it was hard not to think, "What's different here?" All the factors he cited have been true of the market for weeks now, and saying that the Dow is going to sell off because the Dow is selling off doesn't really count as much of a prophecy.
More to the point, the barrage of technical reasons for the sell-off we were offered today are essentially irrelevant to the underlying fundamentals that seem at last to be driving this market downward: the Asian crisis, declining corporate earnings and profit margins, and slowing growth. And while investors have become accustomed to buying on the dips, the truth is that the prices of even already beaten-down stocks are still so high that it's hard to see them as bargains. In some cases, stocks whose value has been cut in half are still trading at P/E ratios two or three times the market's historical average. And undeniably great companies, like Cisco Systems and Coca-Cola, are trading at prices so high above their annual growth rates that describing them as cheap in any sense seems preposterous.
Who knows where the market will be heading in the next couple of weeks? But for too long now bulls have been operating under the delusion that liquidity was necessarily going to drive this market higher. There was just too much money in the market for stocks to drop, we were told. But of course money that flows into the stock market can just as easily flow out of it, and nothing will encourage that outward flow like declining equity prices. In the long run, stock prices will mirror corporate earnings and the broader interest-rate environment. Interest rates are about where they've been for the past 3½ years, but corporate earnings are now significantly worse than they have been over that period. It won't be any surprise if stock prices end up significantly worse as well.